© uhcba energy institute 1 developing energy resources in the caspian: in the caspian: soviet and...

© UHCBA Energy Institute UHCBA Energy Institute 11

Developing Energy ResourcesDeveloping Energy Resources in the Caspian: in the Caspian:

Soviet and Independence PeriodsSoviet and Independence Periods

S. Gürcan GülenS. Gürcan Gülen, Ph.D., Ph.D.

UNIVERSITY ofHOUSTON

BAUER COLLEGE of BUSINESS

ENERGYINSTITUTE

Second JointSecond JointUniversity of Houston – Oxford UniversityUniversity of Houston – Oxford University

ConferenceConferenceApril 19-21, 2001April 19-21, 2001

www.uh.edu/energyinstitutewww.uh.edu/energyinstitute


Soviet TimesSoviet Times

• In 1988, the U.S.S.R.In 1988, the U.S.S.R.– Was the world’s largest producer of oil (11.8 mb/d)Was the world’s largest producer of oil (11.8 mb/d)– Was the second largest exporter of oil in the world Was the second largest exporter of oil in the world

(4.1 mb/d)(4.1 mb/d)– Was the world’s largest producer of natural gas Was the world’s largest producer of natural gas

(817 bcm a year)(817 bcm a year)

• Russian Republic accounted for 91% of oil Russian Republic accounted for 91% of oil and 65% of gas production.and 65% of gas production.

• The Caspian countries accounted for 8% of oil The Caspian countries accounted for 8% of oil and 12% of gas production.and 12% of gas production.


After the CollapseAfter the Collapse

• Along with many other industries, the oil & gas Along with many other industries, the oil & gas sector contracted. sector contracted.

• Caspian countries wanted to support their Caspian countries wanted to support their economic independence from Russia based on economic independence from Russia based on oil and gas export revenues.oil and gas export revenues.

• But, the interdependent Soviet economic But, the interdependent Soviet economic network (especially in the oil & gas sector) network (especially in the oil & gas sector) posed challenges.posed challenges.

• There are stories of relative success as well as There are stories of relative success as well as of consistent disappointment in Caspian of consistent disappointment in Caspian countries’ efforts.countries’ efforts.


But, First…But, First…

• In order to have the right perspective on In order to have the right perspective on the issues faced by the Caspian the issues faced by the Caspian countries, let us look into some countries, let us look into some numbersnumbers– ReservesReserves– ProductionProduction– ConsumptionConsumption


Reserves (end of 1999)Reserves (end of 1999)

0

100

200

300

400

500

600

700

800

900

OPEC S. Arabia Iran Russia U.S. N. Sea Caspian

bill

ion

ba

rre

ls

0

250

500

750

1000

1250

1500

1750

2000

2250

trill

ion

cu

bic

fe

et

OilGas

Source: Source: BP World Energy BP World Energy


ReservesReserves

• 1.6 percent of World’s Oil1.6 percent of World’s Oil

• 5.0 percent of World’s Gas5.0 percent of World’s Gas

• After 12-3 years of investment, After 12-3 years of investment, more gas, but not much oil is more gas, but not much oil is found! (Kashagan pending)found! (Kashagan pending)


Reserves (end of 1999)Reserves (end of 1999)

0

1

2

3

4

5

6

7

8

9

Azerbaijan Kazakhstan Turkmenistan Uzbekistan

bil

lio

n b

arre

ls

0

20

40

60

80

100

120

tril

lio

n c

ub

ic f

eet

Oil

Gas

Source:Source: BP World EnergyBP World Energy


Production & Production & Consumption of OilConsumption of Oil

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7


mill

ion

ba

rre

ls a

da

y

ProductionConsumption



Production & Production & Consumption of GasConsumption of Gas

0

1

2

3

4

5

6


bill

ion

cu

bic

fe

et

a d

ay

ProductionConsumption



Production & ExportsProduction & Exports

• 1.7 percent1.7 percent of World’s Oil of World’s Oil• Only about 150,000 b/d exported Only about 150,000 b/d exported

outside FSUoutside FSU• Saudi Arabia alone has more Saudi Arabia alone has more

spare capacity!spare capacity!• 3.2 percent3.2 percent of World’s Gas of World’s Gas• Almost no exports outside FSUAlmost no exports outside FSU


Now, challenges..Now, challenges..

• Oil & gas production fell significantly after the Oil & gas production fell significantly after the break-up becausebreak-up because– Centrally-managed production quota system of the Centrally-managed production quota system of the

Soviet timesSoviet times• Failure to maintain equipment & fieldsFailure to maintain equipment & fields• Poor reservoir managementPoor reservoir management• Excessive drilling & floodingExcessive drilling & flooding• No access to modern technologiesNo access to modern technologies

– Persistent problems after the break-upPersistent problems after the break-up• No adequate management systemNo adequate management system• Continued reliance on the administrative systemContinued reliance on the administrative system• No incentivesNo incentives


Index of Oil Production Index of Oil Production (1989=100)(1989=100)

50

60

70

80

90

100

110

120

130

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Azerbaijan

Kazakhstan

Russia

Turkmenistan

Total



Index of Gas ProductionIndex of Gas Production(1989=100)(1989=100)

0

20

40

60

80

100

120

140

160

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Azerbaijan

Kazakhstan

Russia

Turkmenistan

Uzbekistan

Total



..on the demand side..on the demand side

• Energy has been wasted and continues Energy has been wasted and continues to be used wastefully:to be used wastefully:– Subsidized pricing of energy.Subsidized pricing of energy.– Non-payments by users.Non-payments by users.


Energy Intensity Energy Intensity (Btus per $ of GDP)(Btus per $ of GDP)

19831983 19901990 19921992 19981998

U.S.S.R.U.S.S.R. 59,37859,378 64,01364,013

AzerbaijanAzerbaijan 129,644129,644 102,020102,020

KazakhstanKazakhstan 99,69199,691 77,06277,062

RussiaRussia 70,61670,616 74,19874,198

TurkmenistanTurkmenistan 57,85057,850 111,709111,709

UzbekistanUzbekistan 83,01783,017 88,90688,906

73,47973,479 75,68575,685

U.S.U.S. 16,57716,577 14,64514,645 14,62814,628 13,41013,410

FranceFrance 7,9657,965 7,3957,395 7,7377,737 7,3907,390

JapanJapan 6,6866,686 6,2346,234 6,1846,184 6,5526,552

Source:Source: Energy Information AdministrationEnergy Information Administration


Per Capita Energy Per Capita Energy Consumption (MMBtus)Consumption (MMBtus)

19831983 19901990 19921992 19981998

U.S.S.R.U.S.S.R. 184184 209209

AzerbaijanAzerbaijan 132132 6464

KazakhstanKazakhstan 203203 121121

RussiaRussia 235235 177177

TurkmenistanTurkmenistan 7272 5656

UzbekistanUzbekistan 7878 7777

208208 153153

U.S.U.S. 313313 337337 335335 351351

FranceFrance 144144 156156 164164 170170

JapanJapan 121121 148148 155155 168168

Source:Source: Energy Information AdministrationEnergy Information Administration


Investment?Investment?

• Unattractive investment environment.Unattractive investment environment.– Concerns about rule of law.Concerns about rule of law.– Lack of world-class petroleum laws.Lack of world-class petroleum laws.– Lack of world-class regulatory frameworks, Lack of world-class regulatory frameworks,

including an independent regulator.including an independent regulator.– Lack of tariff structures.Lack of tariff structures.

• In short, no clear and transparent In short, no clear and transparent process!process!


Legal & Regulatory Legal & Regulatory EnvironmentEnvironment

AzerbaijanAzerbaijan KazakhstanKazakhstan TurkmenistanTurkmenistan UzbekistanUzbekistan

Petroleum Petroleum LawLaw

NONO PARTIALPARTIAL YESYES NONO

RegulationsRegulations NONO NONO YESYES NONO

Env’l LawEnv’l Law YESYES YESYES

One-stop One-stop ShopShop

NONO NONO YESYES NONO

Pipeline LawPipeline Law NONO NONO NONO NONO

Tariff RegsTariff Regs NONO YESYES NONO NONO


AzerbaijanAzerbaijan

• Remains dependent on Russian & Georgian Remains dependent on Russian & Georgian pipeline and rail network for its exports!pipeline and rail network for its exports!– Not enough oil to justify new non-Russian main Not enough oil to justify new non-Russian main

export pipelines.export pipelines.

• Infrastructure from Soviet times crumbling.Infrastructure from Soviet times crumbling.• Difficulty of getting equipment to Baku for Difficulty of getting equipment to Baku for

offshore activities.offshore activities.• Keeping Russia’s intentions in the region in Keeping Russia’s intentions in the region in

check.check.


KazakhstanKazakhstan

• Remains almost fully dependent on Russian Remains almost fully dependent on Russian pipeline and rail network for exports.pipeline and rail network for exports.– Recently completed CPC pipeline appears dedicated to Recently completed CPC pipeline appears dedicated to

Tengiz, but runs through Russia.Tengiz, but runs through Russia.

• Cannot supply domestic refineries with domestic Cannot supply domestic refineries with domestic oil; needs to import Russian oil!oil; needs to import Russian oil!

• Refineries still use outdated Soviet technology Refineries still use outdated Soviet technology that was designed as part of the whole Soviet that was designed as part of the whole Soviet system.system.– Refineries cannot produce the products Kazakhstan Refineries cannot produce the products Kazakhstan

needs today!needs today!


TurkmenistanTurkmenistan

• Turkmenistan is ready to export, but does not Turkmenistan is ready to export, but does not have a significant alternative to the Gazprom have a significant alternative to the Gazprom system.system.– Gazprom used to send its gas to hard currency Gazprom used to send its gas to hard currency

markets, while sending Turkmen gas non-paying markets, while sending Turkmen gas non-paying customers in Ukraine.customers in Ukraine.

• Turkey, a key market, appears staurated.Turkey, a key market, appears staurated.• Russia may need Turkmen gas!Russia may need Turkmen gas!• After Shah Deniz...After Shah Deniz...


Caspian PipelinesCaspian Pipelines


Happiness is Multiple Happiness is Multiple Pipelines?Pipelines?

PromotersPromoters

LengthLength

(miles)(miles)

Invest.Invest.

($ Bil.)($ Bil.)

Capacity Capacity (mb/d)(mb/d)

Tariff Tariff ($/b)($/b) MarketMarket

ChinaChina CNPCCNPC 21202120 1.51.5 0.30-0.400.30-0.40 33 ChinaChina

DruzbhaDruzbha RussiaRussia In useIn use 0.240.24 33 EuropeEurope

CPCCPC CPCCPC 940940 Oct 01Oct 01 0.56-1.340.56-1.34 2.8-3.42.8-3.4 Medit.Medit.

NovorossiyskNovorossiysk RussiaRussia 850850 In useIn use 0.160.16 2.122.12 Medit.Medit.

SupsaSupsa AIOCAIOC 550550 In useIn use 0.10-0.240.10-0.24 1.981.98 Medit.Medit.

CeyhanCeyhan 11251125 2.52.5 1.001.00 2.72.7 Medit.Medit.

KTI-GulfKTI-Gulf TotalTotal 15601560 4.54.5 1.001.00 3.4-4.13.4-4.1 AsiaAsia

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