It was supposed to be the next Persian Gulf, or another North Sea. It was thought that indications of a fabulous reservoir of oil would bring vast wealth to the impoverished and unstable region where the United States, Russia, and Iran vie for influence.
But the Caspian Sea basin is still just a dream. Low world oil prices are slowing the search for its fabled black gold. The potential remains just that - and hopes of an immediate bonanza have dulled.
With oil prices hovering around $10 a barrel and doubts growing about the reserves, oil companies are rethinking plans. Some are pulling out or paring down operations, citing high transport costs and questionable deposits. Others are delaying projects.
"With the price fall, people are more cautious about spending money and are walking away from exploration projects," says Stephen O'Sullivan, a Moscow-based oil analyst with the international brokerage United Financial Group. "Maybe expectations of a pot of gold in the Caspian were a little ahead of reality. Now realism is creeping in. It's clear it's not the bonanza it was thought to be."
US first choice in danger
One of the biggest casualties may be a multibillion-dollar pipeline heavily pushed by the Clinton administration.
Geological conditions have led oilmen to believe that there are up to 200 billion barrels of oil out there. Not far away, onshore in Kazakhstan, the huge Tengiz field boasts 6 billion barrels of recoverable oil. Scientists believe similar resources lie beneath the Caspian.
But it is costly to transfer the oil to markets, owing to a lack of proper infrastructure and pipelines.
Washington is obsessed with what future route may be chosen, as the Caspian lies at the heart of an unstable region. The sea is ringed by Azerbaijan, Iran, Kazakhstan, Turkmenistan, and Russia. Nearby are Georgia, Tajikistan, Pakistan, and Afghanistan.
Washington is still lobbying hard for a 1,080-mile pipeline leading from Baku in Azerbaijan to the Turkish Mediterranean port of Ceyhan. It argues that such a route would limit dependence on Russia and undermine Iranian competition for an alternative pipeline.
Washington's interest in the Caspian is strategic as well economic in a region fraught with political complexities.
The US, which has slapped sanctions on Iran, does not want oil passing through that unfriendly state. The Clinton administration is also vying to wrest influence in the region from Russia, partly because of political instability in the country, a collapsing regional power since the 1991 fall of the Soviet Union.
One reason Washington favors the Turkey route would be to bring that country more firmly into the NATO orbit, and closer to Europe. Turkey has had frosty relations with the European Union since being passed over for EU membership talks in 1997.
"We believe that the East-West transit corridor is the way to go," Clinton's special envoy to the Caspian, Richard Morningstar, told reporters during a visit to Moscow on Feb. 25. "We think that it is good for the region and ... it is good for all countries in the world."
Mr. Morningstar was to defend the pipeline's economic viability at a hearing yesterday by a Senate subcommittee on International Economic Policy, Export, and Trade Promotion.
More pipelines needed?
He has a tough case to argue, with estimates that the pipeline will cost up to $4 billion to build. So far, international consortia working in Azerbaijan have not found test-drilling results that would justify such spending. "We think the potential is there. But we don't know if there is need for another route," says Carl Burnett, President of Mobil Oil Kazakhstan Inc.
At present, oil either goes by rail or existing pipelines to Novorossiysk in Russia through volatile Chechnya or to Supsa in Georgia's Black Sea. Another pipeline is under construction from Kazakhstan to Russia's Black Sea port, with expectations that it could handle up to 12 million tons by 2001.
However, in anticipation that there will be more oil flowing, proposals have been floated for further pipelines either running east from Kazakhstan to China, south to Iran, or upgrading routes to Supsa and Novorossiysk.
US-based Chevron and Mobil and Royal Dutch Shell agreed last December to study the feasibility of the Baku-to-Ceyhan pipeline being pushed by Washington. But industry sources say oil firms increasing favor the shorter, cheaper route to Georgia's Black Sea port, or one leading to Iran.
"The pipeline scenario depends on the volumes of additional oil discovered," says Phil Meek, president of Chevron Munaigas Inc., based in Almaty.
It is a sort of Catch-22. If production does not increase, there will not be more pipelines. But without more pipelines, production is very expensive.
Gloom deepened in Baku with the news last month that a consortium led by US-based Pennzoil was pulling out after drilling three exploration wells. The consortium, Caspian International Petro- leum Company, said reserves of oil and gas found did not make its $3 billion project worthwhile.
Meanwhile, oil industry sources say Chevron wants a 30 percent cut in tariffs to export oil from Kazakhstan because current oil prices render production too expensive.
One of the companies that is remaining in Azerbaijan questions whether new pipelines are needed. The Azerbaijan International Operating Company says the two current pipelines linking Baku with Novorossiysk and Supsa can handle the 105,000 barrels per day output expected this year. Operations are not expanding, for now, says spokeswoman Pamtaman Bayatly of the 10-member consortium, whose $11 billion contract involves developing proven oilfields. "Certainly the price drop is affecting oil projects in Azerbaijan," she says. "We have to review our plans for this year and explore ways to reduce operating costs."
Oil majors say they are committed to remaining in the Caspian, noting that they take a long-term view. They point out that over the past century oil has gone up and down, averaging between $15 and $18 a barrel.
Their thinking is that if prices remain low for several years, supplies elsewhere, such as the North Sea, will be used up. Then demand - and thus prices - would rise again and the Caspian's attractiveness would return.
"Of course people are looking at where they can cut costs ... but we're here for the longer term," says Peter Henshaw, a spokesman for British Petroleum-Amoco in Baku.
Asked how long his firm would tolerate an oil price slump, he replied: "I'll pass on that one."
This sanguine view is not taken by smaller, national companies such as Kazakhoil, which last year cut costs and the amount of oil pumped because profits were merely one-fourth of those in 1997.
"The situation is tough with price falls. If the crisis continues there will not be enough money to build new pipelines," says Kazakhoil spokesman Sergei Kuzovnikov.