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The Caspian Oil Expected Role For Meeting Tomorrows World Energy Needs

Introduction:

Day after days, variant news, issue by news agencies, energy companies and so on, regard Caspian energy imperatives, which bears in mind the questions of: which data is true and reliable? Is the Caspian oil a treat in the erosion of OPECs market share? What are Irans duties regarding Caspian energies? Really it is not clear whether Iran should rely on Caspian oil&gas transit revenues or should try to expand its own markets and just import the Caspian oil and gas to meet its northern provinces energy needs and release and free some sources of southern fields for export. This article focus to find answers to the above questions.

Caspian oil reservoirs:
Potential Oil reservoirs:
Variant estimates:

Variant estimates regard region energy resources have been issued by different sources. You can find estimates of 25-30, 33, 35, 70, 100, 200 and even estimate of 250 bn barrels, but whether 25 is true or 250? Although, on the one hand, among some sources of estimate (For an instance: Express, a French journal) you can find estimation of 243-250 billion barrels of oil reserves (close to the 269 billion barrels of proven oil reserves already discovered in Saudi Arabia) but, a working estimate never stands around these numbers, for example, Some US companies use a working estimate of 65 billion barrels. In a glance on working estimates, what becomes clear is that, a working estimate never exceeds from 100 billion barrels. It is, where, most internal estimates of oil industry analysts put the figure at 40 to 75 bn barrels, comparable to North Sea reserves or, at best, Iraqs potential reserves. Accordingly, Recently the Wood Mackenzie consultancy of Scotland estimated reserves of the five Caspian states-and only the Caspian parts for Iran and Russia-at 39.4bn barrels of oil.

As a consequence, it can be said that, whatever the most likely estimate, there appears to be a consensus emerging that, though the area is "unlikely to become another Middle East" or "major competitor for the Persian Gulf," it may play "a role as a marginal supplier" in "arresting a jump in the price of oil" in a high price environment and diversifying supply, much as the North Sea does today.

Proven Oil reserves:

Caspian region oil production emanates from proven (economically recoverable) reserves of 15-34 billion bbls, based upon BP Amoco, EIA, and Wall Street Journal estimates. Based on the U.S. government, the region has proven reserves of 10 bn (according to U.S energy department), in other U.S source of research roughly 16 billion (bn) barrels of oil and in the other 15-40 billion barrels. However, all of these numbers are speculative-until a geological structure has been drilled and significant risk remains that it may not contain oil. Preliminary drilling offshore in the South Caspian has already yielded some disappointing results, so it is important to keep in mind that Central Asia and the Caucasus at this point have been demonstrated to contain no more than two to five percent of the world's proven oil reserves, and it is impossible to make the case that the Caspian region is an area of global strategic importance on the scale of the Persian Gulf, where, this important point is muddied in most researches on the Caspian, With a handful of exceptions, these researches tend to cite reserve figures too high, that I can merely range them from optimistic to unrealistic.

CASPIAN OIL: CURRENT INTRA MOVEMENTS:

Caspian Sea region oil has several markets now and a wider planned variety of Potential markets for tomorrow. Tomorrows potential markets will be discussed in the coming parts of the paper. But for Now, nearly all Caspian crude oil goes west, largely via pipeline to /or through Russia to European markets; and a lesser amount by tanker through the Bosporus straits to Western European markets. The Caspian region produced an estimated 1.4-1.5 million barrels per day (bbls/day) including natural gas liquids in 2001, or 1.9% of total world output.

BARRIERS AND BOTTLENECKS, HESITATING INVESTORS OF INVESTING IN THE CASPIAN PROJECTS:

It is said If well managed (and this is a big if), profits from oil and gas exports could stimulate economic growth and a rise in living standards in the energy-producing states, meanwhile will help these countries move away from the Russian sphere of influence, but it should not be neglected that, from the developers side, some disadvantages weak the energy companies rushing to the area, among them high costs of developments and uncertainties regard investment rate of returns lie in the core. The main obstacles for tapping the Caspian hydrocarbons are as follows:

High costs of exploitation and transportation:

Caspian oil will be expensive and technologically difficult to explore and develop. Production Costs in the Caspian Sea are more than three times of those in the Persian Gulf. With the exception of the super giant Tengiz field, that Chevron hopes to be able to produce at around $2/bbl at peak production, most Caspian fields are expected to cost closer to $5/bbl and in some cases maybe more. The Caspian Sea oil is also burdened with additional costs for the construction of new infrastructure, high-cost imports of human and technological resources and the cost of building long export pipelines on the one hand and On the other hand, there are evidences that the Saudis subsidize sales of their oil to European markets where prices of Saudi crude in Europe are found to be 72 cents lower than in Asia. Where as one barrel of Saudi crude oil costs approximately $3,for the producer, reaching oil markets, North Sea oil final cost is 10-12 and the Caspian gathers at $10-14.

Geographical status: There is no easy way to export crude oil from the Caspian basin. The major energy-producing countries are landlocked and thus must rely on the cooperation of neighboring countries to ship their crude to market. Many of the potential pipeline routes pass through highly unstable and conflict-prone regions so the risk of not being able to transport Caspian Oil to market is perceived to be the most significant business challenge for oil investment in the region.

Political issues: Political issues within the region could impose barriers to oil traffic, including internal instability within oil-producing countries; administrative disorganization, mismanagement, corruption and etc. Meanwhile poor communications infrastructure, unstable government structures, political conflicts, imperfect payment systems and inadequate energy policies are a double burden.

Capital: According to Cambridge Energy Research Associates, $70-$100 billion of funds is needed to develop and transport the regions oil reserves. Although, in theory, the major international capital markets could provide assistance, many multinational companies may seek higher returns on capital investments elsewhere, and may be further inhibited by the political and economic risks associated with crude exploitation and export.

Legal issues: Existence of disputes over territorial claims, as well as lack of protection for private property rights, are also roadblocks to oil production and distribution in that they create uncertainty about ownership of investments and oil resources. In addition to the unresolved issue of Caspian Sea boundaries, there are outstanding questions concerning the legal status of the Bosporus Straits that cloud access to the most viable route for Caspian Sea crude to reach the destination markets.

IF IT IS SO, THEN WHAT ARE THE MAIN INCENTIVES, EAGERED AND ATTRACTED THE U.S AND THE WESTERN COMPANIES TO INVEST IN THE CASPIAN BASIN?

Energy world is a coveted world; those who covet are the western nations, more specifically North America and its allies in Western Europe. In this context, The West seeks the following strategic objectives and interests in the Caspian region:

Crude oil of the region is considered to be of good quality.

Since the needs of the producing countries are relatively low and are expected to remain low, the biggest part of the Caspian oil is scheduled for export.

The fact that the countries of the region lack the capital and the technology to proceed independently to the expansion of these oilfields, provides western companies with considerable investment opportunities. Foreign companies role in the Persian Gulf is severely limited by government monopolies, and political issues, such as the UN sanctions on Iraq and a fully competitive market which narrows energy companies profit margins and bargaining opportunities.

Introducing new routes ensure the environmental safety of the Bosporus Strait.

Caspian energy sources are attractive to Turkey. They are close and they offer an opportunity to Turkey to offset part of its energy needs bill through transit revenues it could charge on oil and gas shipments across its territory, meanwhile inherent Caspian crude chemistry is environmentally attractive to Mediterranean and Turkish refineries. It will displace supplies of less environmentally friendly crudes from the Middle East and West Africa, on a fully competitive basis.

Investing on Caspian energy will diversify the western energy sources of supply and keep energy prices at low levels. Undoubtly, the Caspian oil provides the best opportunity for the U.S and the West to reduce their dependence on Middle East crude oil. The U.S. now imports 23.7 percent of its oil from Saudi Arabia and Iraq, but virtually none from the Caspian region.

One reason for rush could be for eyeing and pursuing, step-by-step, of the growth of Islamic movements in the region.

To isolate I.R.Iran by reducing her energy revenues and mitigating her important role in the region. This interest could be best served by preventing any Iranian role in Caspian energy.

Their presence in the region, enhances political and non-energy commercial opportunities for the West; despite above mentioned facts, it should not be neglected that, the Caspian oil is not a unique opportunity for oil companies, so, countries of the Caspian region will have to ensure that the terms they offer are attractive enough to secure the future interest of oil companies; but the only opportunity for the Caspian republics.

OIL DEMAND OUTLOOK:

World oil demands outlook:

Oil is expected to remain the dominant energy fuel till 2020, as it was for decades. According to IEO2002, world oil supply in 2020 is projected to exceed the 2000 level by 41 million barrels per day. Petroleum demand is projected to grow at an annual average rate of 1.5 percent through 2020, led by growth in the transportation sector, which is expected to account for more than 70 percent of petroleum demand in 2020.

The share of crude of the world energy pie will not increase because countries in many parts of the world are expected to switch from oil to natural gas and other fuels, particularly for electricity generation. The geographical composition of energy demand is bound to change substantially by the year 2025. Two-thirds of the overall energy growth will occur in newly industrializing economies. Most of the growth will occur in the developing countries of Asia, where half the worlds population resides. Energy growth in Asia is expected to reach an average of 4.3% per year, whereas the members of the OECD will produce a slowdown to 1.3%.

Caspian Energy Reservoirs Act No Important Role For Now, But Can It Play A Significant role For Tomorrow? On the basis of present information, the Caspian crude oil is not a significant factor at present chessboard, where in an optimistic case its total reserves are less than five percent of the world total. Although Caspian Failure Costs are high; with giant field potential finding and Development Costs are low, and it is that may drive development forward. The only country, which can clearly produce a substantial amount of oil, is Kazakhstan; Azerbaijan has promising areas, but no proven oil. Given a reasonable degree of long-term stability, Caspian transportation costs are likely to halve in the coming decade. Equally technology improvement should have a dramatic impact on reducing Caspian development drilling and well completion costs. With the development of common infrastructure there will be further cost savings. By 2010 the built up cost per barrel for Caspian crude should fall to around $8/barrel. No need to say that, Three factors are generally given credit for the impressive resiliency of non-OPEC production: development of new exploration and production technologies, efforts by the oil industry to reduce costs, and efforts by producer governments to promote exploration and development by encouraging foreign investors with attractive fiscal terms. So any estimate for Caspian tomorrows role, hardly depends on above three factors and the factor of oil price where it is said, as long as the oil price maintains a sustainable level of around $15/bl or more, the Caspian will be profitable. So the Caspian region will enjoy from high rates of exploration, if and only if, above preconditions for Caspian crude oil enhancement fulfill completely.

Outlook For The Caspian Oil Capabilities:

EIA estimates that Caspian Sea regions oil production will more than double by 2010 - to about 3.9 million bbls/day, according to this source total oil production of the region, in 2001, was about 1.45 million bbls/day. According to the International Energy Agency (IEA) forecast, oil exports from the Caspian Basin could reach 1.5 mb/d by early of the 3rd millennium; Given the difficulties and cost of developing Caspian oil as well as the continuing delays in resolving the issue of transit routes- under optimistic circumstances- the region could export close to 2.3 mb/d by 2010, and thus meet about 7 percent of accelerated growth in the world oil market during this timeframe. According to some sources of estimate it is said even if the region reached its maximum oil production potential, by the year 2010, exports would account for slightly less than 3 percent of global oil consumption.

According to some other source of estimate, Caspian energy export capabilities by 2015 can be seen through two scenarios:

1- high production scenario: 4 to 5 mb/d export capacity. If Baku-cyhan route completes on time, exist and planned pipelines can transfer 3.5 million barrels per day of oil.

2- low production scenario: 2.5- 3 mb/d export capacity. Exist and planned pipelines can transfer 3 million barrels per day of oil.

Recently, Wood Mackenzie estimated the regions production 4 million barrels per day by 2014. This projection depends on optimistic assessments of the quantity of reserves that lie in the shallow waters of the Kazak offshore sector.

According to IEO2002 Production from the Caspian Basin is expected to exceed 6.5 million barrels per day by 2020. Although it seems an optimistic forecast (just compare it with footnote 2), even if we accept it, the share is about %5 of total oil production in the world, as before lesser than its counterpart (North sea) production share in the world (despite a moderate decline in North Sea production after a peak in the middle of the current decade).

THE REST OF THE WORLD OIL OUTLOOK:

OPEC oil production is expected to reach 57.5-60 million barrels per day in 2020, nearly double the 30.9 million barrels per day produced in 2000, assuming sufficient capital to expand production capacity. In view of the existence of three-fourths of the world's energy reserves in OPEC member countries, they will increase their share of oil production in the near future to meet global oil demand.

Non-OPEC oil production is expected to increase from 45.7 to 61.1 million barrels per day between 2000 and 2020. North Sea production is expected to peak in the middle of the current decade, reaching 7.5 million barrels per day. Production from Norway, Western Europes largest producer, is expected to peak at about 3.4 million barrels per day in 2004 and then gradually decline to about 3.0 million barrels per day by the end of the forecast period with the maturing of some of its larger and older fields. Oil producers in the Pacific Rim are expected to increase their production volumes significantly as a result of enhanced exploration and extraction technologies. Oil producers in Central and South America have significant potential for increasing output over the next decade. By 2010, projected production in Brazil reaches nearly 2 million barrels per day and in the offshore regions of West Africa exceeds 2 million barrels per day. By 2010, oil production in Mexico is expected to increase by 30 percent above current levels.

Hence other parts of the world except the west can play an important role of covering world energy needs. Future role of the Caspian energy head to head of the Middle East (in general) and OPEC (in particular): will Caspian be a treat in the erosion of OPECs market share?

Production rise are expected for both OPEC and non-OPEC producers; however, only about one-third of the total increase is expected to come from non-OPEC areas. New exploration and production technologies, extensive cost-reduction programs by industry, and attractive fiscal terms to producers by governments all contribute to the outlook for continued growth in non-OPEC oil production. According to IEO (2002) about two-thirds of the increase in petroleum demand over the next two decades will be met by an increase in production by members of OPEC rather than by non-OPEC suppliers. OPEC production in 2020 is projected to be more than 26 million barrels per day higher than it was in 2000. Production costs in Persian Gulf OPEC members are less than $2 per barrel, and the capital investment required to raise production capacity by 1 barrel per day is less than $5,500. For OPEC producers outside the Persian Gulf, the cost to expand production capacity by 1 barrel per day is considerably greater, exceeding $12,000 in some member nations. By 2020, OPEC exports to industrialized countries are estimated to be about 6.2 million barrels per day higher than their 2000 level, and more than half the increase is expected to come from the Persian Gulf region. OPEC petroleum exports to developing countries are expected to increase by more than 17.0 million barrels per day over the forecast period, with more than half of the increase going to the developing countries of Asia. China, alone, is likely to import about 7.2 million barrels per day from the OPEC by 2020, virtually all of which is expected to come from Persian Gulf producers. North Americas petroleum imports from the Persian Gulf are expected to almost double over the forecast period. West African producers are also expected to increase their export volumes to North America. With a moderate decline in North Sea production, Western Europe is expected to import increasing amounts from Persian Gulf producers and from OPEC member nations in both northern and western Africa. Substantial imports from the Caspian Basin are also expected. Moreover developing nations are expected to increase their already heavy dependence on Persian Gulf oil. 80% of the incremental demand will be in developing states; OPEC will supply 85% of the new demand.

FORESEEABLE CUSTOMERS OF The CASPIAN OIL

a) South and East Asia:

By the year 2010, world demand for oil is expected to reach roughly 100 m/bd which Almost half (14 mb/d) of the projected increase in the global demand for oil in 2010 will come from East Asia (excluding Indonesia and India). According to some estimates by the year 2010 South Asian countries shall be consuming more than double the current levels of primary commercial energy. It becomes self evident that South Asian countries would experience over-increasing energy demands and they lack the resources and capital to meet this demand. According to an estimate, crude oil imports from the Asia-Pacific region are projected to increase from 58 percent to 72 percent over the next seven years, and by 2010, it is estimated that this region, with China and India in the forefront, will consume 18 mb/d of Persian Gulf oil, or more than Europe and the United States combined. Based on an average consumption increase of 5% per year, Asian/Pacific demand for oil is expected to reach 33.5 million bpd by 2010. China alone could be consuming 7.2 million bpd by 2010, and 10.7 million bpd by 2020, while oil production in Asia/Pacific region may decline from its current level of 6.3 million bpd. China imported 65.5 million tons of oil during the first 11 months of 2000 alone, which is a 97 percent increase compared to the same 11 months in 1999. According to CIA estimates, the Chinese demand for oil, while coupled with the expected Indian demand, will likely reach 120 billion barrels/day within the next 30 years. That is almost twice the 60-70 billion barrels per day that is presently consumed globally. What is clear is that most of these regions oil needs will be covered by Persian Gulf oil and a bit by Caspian oil.

b) The West:

Although the structure of gross inland consumption in the EU shows an increasing share of natural gas, the degree of Europes oil dependence remains considerably high, and oil with no doubt remain its main fuel in the EU in the foreseeable future. Oil demand in the advanced industrial nations of Europe and North America is projected to grow only 6 mb/d. The North Sea, supplies are also expected to decline in the early half of the 21st century, and the western powers, may look the hydrocarbon resources of the Caspian region.

Iran and Future Oil markets:

Iran, the second largest OPEC oil producer, holds 100 billion barrels of proven oil reserves, about 10 percent of the worlds total. Irans current oil production capacity is estimated at 3.9 million barrels a day. Iran needs to produce more oil (and gas) in order to increase its contribution to the incremental world demand and to obtain more hard currency for the financing of its future economic growth and development, as well as to satisfy growing domestic demand. In the oil sector, Iran can expand its production capacities within OPEC's framework to secure a significant part of the need of the world. Iran must double its production capacity in the next two decades to be able to maintain its current 15% OPEC quota; plans should target a production capacity of 8 million barrels per day by 2020. In this regard, over the last three years, 26 billion barrels of crude oil (and 855.3 billion cubic meters of natural gas) were added to Iran's energy reserves, while the authorities project foreign investment of 25 billion dollar over 2000-2005 for 3rd five year development plan of the country, which all represent acceptable exploration activities and plans.

Irans duties regarding Caspian basin oil:

Recent explorations show that around two thirds of the Caspian oil reserves are located in the northern part of the sea, moreover, Caspian oil in the Iranian territory side has located in deeper waters, so, for the time being, it doesn't seem that exploration of Iranian side Caspian reserves be economical, when the investment funds are restricted and losing the opportunities of exploitation of cheap-inhand-transportable southern common reserves are irretrievable. This is when, on one hand, Iran for the Caspian Sea littoral states means, a market able to absorb 500,000-700000 barrels of oil per day with a transportation cost of less than one dollar per barrel through a pipeline network in northern Iran territory, which makes Iran one of the best and most economical countries in terms of transfer and consumption of oil in the Caspian Sea region, on the other hand Caspian oil and gas absorption form littoral states means release of southern oil capacities, so it is recommended in advance, importing oil from the northern borders for use in Mashad-Tehran_Tabriz, but should not be neglected that, one part of Kazakhstan's oil reserves is not suitable for our refineries for its high sulfur and mercaptan contents and for this reason we have to install special units in our refineries in Tehran and Tabriz to make Kazakh oil fit for refining, In other parts of the Caspian region such as Nabat Dagh in Turkmenistan or Azerbaijan, there is oil similar to that of Iran, which can be mixed with Iranian crude and used in our refineries. There are other types of crude, which have to be desalted and made mercaptan free in order to be fit for refining in Iran.

For this purpose the private sector has been allowed for construction of three oil refineries to refine Central Asian and Caucasian oil in northern Iran. Three refineries, with capacities of 100,000 to 120,000 barrels of oil per day will be set up in Babol, Amirabad and an area north of Golestan province. These projects or projects for changing online refineries to cope with the Caspian oil specifications should be accelerated. It is notable that National Iranian Oil Company (NIOC) is aware of the case whereby in an international tender for a new pipeline from Neka to Tehran, confined pipeline design capacity to 350000b/d. Such volumes of Caspian crude would service approximately 50% of their own northern market needs. The logic behind this strategy is that, being 100% dependent on Caspian crude, may result in a probable collusion by sellers to rise their oil price.

2- Iran like any other oil exporting country would not wish to see its markets undermined by Caspian crude, but because of the strategic and geographical position that it has, can think to the oil transit fees of passing oil via her territory. For instance, Chinese National Petroleum Company (CNPC) is looking into an oil pipeline route that would run from Kazakhstan to the border with Turkmenistan and finally be extended through Iran to the Persian Gulf. A number of major Western oil companies are also studying the feasibility of building an oil pipeline from Kazakhstan via Iran to the Persian Gulf. Because oil transit dose not come under OPEC quotas framework, then Iran can think jointly to both of Caspian crude transiting revenues and expanding its own crude markets in an OPEC oil export framework.

Thus, this CNPC project and the project for transporting oil & gas from Kazakhstan & Turkmenistan (respectively) to the Pakistan should be reviewed closely to compete with central Asia oil and gas project (pass through Afghanistan), which supports severely by U.S if our project is economically feasible.

3-Iran could earn fees for swap transactions or for providing a transit route. The fees could be $1 per barrel of oil (or $0.10 per cubic meter of gas) above the transport costs Iran would have to bear. At the high end, that could in theory mean $1.5 billion a year ($1 billion for three million barrels per day (b/d) and $500 million for 50 billion cubic meters a year). Kazakhstan has been engaged off-and-on in crude oil swaps with Iran.

OIL SWAP IS NOT A LONG TERM REMEDY:

In August 19, 1997; USA exempted oil swap trough Iran from ILSA (Damato) ban. Since Sales of what is called early oil are crucial to the profitability of the Caspian projects, and without them, the developers would have no revenue until the pipelines are built.

If the projects had no way to sell oil except via a pipeline, then those controlling the pipeline route would be in a position to extract high prices. In particular, Russians could charge such high fees for a pipeline from the Kazakh oil fields that they, rather than Kazakhstan, would reap most of the benefits. In practice, swaps of early oil have been a useful tool for Kazakh oil development, but the oil swapped has all come from the Kazakh share rather than from what belongs to US oil companies.

Then Although cheap energy imports from the Caspian would allow Iran to free up more of its own resources for export and Using Caspian oil and gas in the large cities of northern Iran would free up Iranian Oil, allowing more exports through the Persian Gulf, eliminates internal crude transportation costs, by not having to bring equivalent oil from Southern fields meanwhile, Swap volumes are not material, and have the advantage of falling outside of OPEC accounting but Iran must be careful of the USA trick of oil swap and not to rely on SWAP for long-term. So it is recommended in advance, establishment of a Fund like that which now exists for extra oil revenues, just for swap revenues, to accelerate investing on Iran energy export projects to the west from Armenia and Turkey routes.

CONCLUDING REMARKS:

It would be unwise to assume that the region will be a major energy producer in the next one or two decades. For now, under any scenario, the Caspian could improve global energy security at the margins and It would be mistaken to view the Caspian region as a new Persian Gulf and accordingly to over-emphasise its strategic value to the industrialized world (even for tomorrow).

The prospects for Caspian energy development are mixed. In addition to the mentioned uncertainties about the future of the Caspian oil, one certain subject remains which will consume more or less the Caspian oil for export and that is: Given reasonable expectations for economic growth, neighboring countries such as the Ukraine, Romania, Bulgaria and Turkey can absorb much of the projected export surplus of Caspian oil over the next decade. Projected increases in oil demand from these countries, combined with exports to supply refineries in Grozny, Russia and northern Iran could absorb 1 million barrels to 1.5 million barrels of oil a day by 2010. This remains not sufficient extra resources to export and to ensure Asian thirsty regions of oil. What could say is that Caspian oil will never be a global swing producer and its production will be strategically tied to Southern Europe and the Black Sea.

Even though the Caspian energy reservoir may not compare favorably with the Persian Gulf and the Arabian Peninsula, it has the potential to meet the alternative energy security requirements of the western world and it may play "a role as a marginal supplier" in "arresting a jump in the price of oil" in a high price environment and diversifying supply, "much as the North Sea (does) today.

Finally, Iran like other OPEC Gulf producers should not wish to see its Asian markets undermined by Caspian crude. Therefore for sound commercial reasons Iran should not plan for long run on SWAP revenues and should work promptly to finalize Iran energy export projects to the Europe and the South East Asia. Further more the other priority for Iran must be prosecution of Caspian legal regime to find a favorable solution




 

 
 
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