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58 Opinion MAPLECROFT RISK BRIEFING:
Will convention on Caspian unlock oil and gas exploration scope?
Camilla Hagelund of Verisk Maplecroft
As 2017 came to a close, Russian foreign minister Sergei Lavrov was optimistic that the legal status of the Caspian Sea would soon be resolved. His statement raised hopes in the oil and gas sector that the remaining border disputes in the southern section of the world’s largest lake will finally be settled. A resolution would remove a key obstacle to oil and gas investment in these disputed areas, which account for around 20% of licensed and unlicensed blocks in the Caspian.
Yet even if a convention is signed in 2018, border demarcation will not be a part of it; the littoral states would still have to resolve this issue through bilateral negotiations. This means the convention would be much less consequential than generally assumed. Indeed, Iran has dampened the optimism generated by Lavrov by reiterating its position, which is irreconcilable with that of the former Soviet states.
We therefore believe that when it comes to opportunities for resolutions in 2018, the border dispute between Azerbaijan and Turkmenistan represents the only plausible prospect. Were these two countries to reach a deal, the disputed Serdar/Kapaz oil and gas field would finally be open to renewed exploration.
The immediate gain from Serdar/Kapaz would likely be tem- pered by an indefinite freeze on developments in Azerbaijan and Turkmenistan’s border regions with Iran. An Azerbaijani- Turkmen agreement would leave Iran in a position where any compromise it made would be seen as a climbdown. Without the full demarcation of the lake, the development of the south- ern section’s gas and oil fields will be held up for many years.
Oil and gas the root and key to Caspian dispute
While the uneven distribution of the lake’s hydrocarbon wealth lies at the root of the disputes, the oil and gas resources can also be the key to the solutions. Iran, for example, dispatched gun- boats in 2001 to stop Azerbaijan from surveying the disputed Alov exploration block. Meanwhile, Russia was motivated to strike a deal with Baku because of the untapped oil resources. Once Mos- cow saw the prospective economic benefits – from corporate Rus- sian participation in exploration and potential transit revenues
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The Caspian seen from Turkmenbashi on the coast of Turkmenistan. The Turkmens' oil and gas ambitions for the world's largest lake have been greatly frustrated by border disputes over the years.
– Russia shifted its position. Similarly, Russia and Kazakhstan are jointly developing fields located in their border region.
These bilateral deals were later consolidated in a trilateral agreement between Russia, Kazakhstan and Azerbaijan. The resulting de facto legal arrangement has facilitated the suc- cessful development of oil and gas resources in the Caspian’s northern section.
Territorial disputes in the Caspian are driven by unequal hydrocarbon distribution
Azeri-Turkmen dispute the chief candidate for progress
Iran’s position is at odds with that of the other Caspian states. Unless Tehran’s approach to settling borders – or that of Azer- baijan and Turkmenistan – changes, progress in the southern section is only plausible in the dispute between Turkmenistan and Azerbaijan.
Indications are that the Turkmen coffers are emptying rapidly. This would explain why the government in Ashgabat appears open to compromise. While Turkmenistan would very likely have to forego some of its territorial claims in a deal with Azerbaijan, it would open the Serdar/Kapaz oil and gas field to renewed appraisal. The field would be technically challenging
“Iran is set to lose the most by accepting the median line approach”
and expensive to develop, but its large oil reserves could be the future commercial key – offering easier export logistics than a gas-heavy project in the Caspian.
A resolution to the border dispute with Azerbaijan would also improve prospects for the trans-Caspian export of Turkmen hydrocarbons to the West, including via the proposed Trans- Caspian Gas Pipeline (TCGP), at least on paper. The Turkmen