BACKGROUND: The US Energy Information Administration (EIA) expects world demand for petroleum to soar by 56 percent until 2020, reaching 119.6 million barrels per day (bpd). At least 10% of the growth in world oil production is expected to come from the Caspian Basin. Based on the assumption of relatively stable oil prices, the EIA forecasts that Caspian oil production will reach 6 million bpd by 2020. Optimistic estimates are even higher. Meanwhile, US oil production is projected to decline at an annual rate of about one percent, dropping to 5.1 million bpd by 2020, increasing US dependence on imported oil from the current 57 percent to 64 percent of consumption, with an increased share of imports coming from the Persian Gulf States. As the US is taking steps to diversify its energy supplies, the recommendations of President Bush's national energy policy task force focus substantial attention on all Caspian projects, including the Baku-Tbilisi-Ceyhan oil pipeline, the Shah-Deniz-Turkey gas pipeline and Kazakhstani oil development.

Asia will also need increased volumes of imported oil. By 2020, China alone will consume 10 percent of the oil produced in the world (an increase from the current level of 6 percent) with only 3 percent of the world oil reserves.

IMPLICATIONS: Even conservative forecasts of Caspian oil production show a requirement for additional export capacity of Caspian oil by 2020. The Caspian oil export capacity is projected to reach 1.3 million bpd by the end of 2001. That includes 600,000 bpd capacity of the Caspian Pipeline Consortium(CPC) pipeline, as well as other existing pipelines and rail routes through Russia and the Caucasian energy corridor (Baku-Supsa pipeline and Baku-Batumi railroad system). The US in fact managed to accomplish its so-called multiple pipeline strategy by splitting oil flows from the Caspian between Russia and the Caucasian energy corridor. But even with the construction of Baku-Tbilisi-Ceyhan pipeline, with a projected capacity of 1,000,000 bpd, an additional export capacity of at least 2 million bpd will eventually be needed to meet production plans in the region. Although new strategic developments might determine the choice, but the export options for Caspian oil in 2020 remain the same: the old North to Russia, South to Iran, West to South Caucasus and Turkey, East to China, or Southeast to India.

Russia tries its best to keep the Russian system dominant. But limitations of its exporting infrastructure’s capacity, including port outlets, cannot guarantee that it will be able to increase the export capacity needs of the Caspian in general, and of Kazakhstan in particular. Even with the CPC and new Baltic pipelines in place and with the assumption that it will be able to prevent its pipeline infrastructure from deterioration, Russia still cannot match the additional Caspian needs. The Turkish Straits pose additional limits on the Russian option; although bypassing the Bosphorus via the Balkans might solve this problem. The Iranian route was always considered economically the most effective.  The general perception is that US policy towards Iran is the major obstacles to this option; the highly congested condition of the Strait of Hormuz is often ignored. The Persian Gulf already exports about 16 million bpd through this Strait, creating the world's by far largest oil chokepoint. As a significant share of growth in world oil production will come from the Gulf States, the volumes exported through the Strait of Hormuz will increase even without additional oil from the Caspian. The increased growth of oil production will also increase traffic in the next most congested waterway in the world - the Malacca Strait, currently with a flow of 9 million bpd.

The Eastern Transportation Options are probably the most distant and challenging. With India and China becoming active importing countries, the eastward transportation of Caspian oil and gas may become commercially and politically viable. There are two possible routes:  East from Kazakhstan to China, and southeast from Turkmenistan to South Asia.  An oil pipeline from Kazakhstan to China is a very high priority for China, although there is little commercial support for this project so far. A pipeline system including oil as well as gas Southeast from Turkmenistan to Pakistan via Afghanistan , potentially reaching India, possibly even bypassing Afghanistan through Iran. Those options have even more political as well as technical challenges. 

The Caucasian Energy Corridor, supported by Turkey, the US, and other Western countries will become an even more important option. The Baku-Tbilisi-Ceyhan (BTC) link can carry additional Caspian volumes to the deep-water port of Ceyhan on the Mediterranean and thus avoid major transportation chokepoints . The development of a bypassing pipeline through the Balkans, as well as completion of the Black Sea connection of the Druzhba pipeline network could substantially increase the potential of the Baku-Supsa link as well.

CONCLUSIONS: Competition over export options may bring Russia closer to the West. Russia wants to maintain influence in Central Asia, but major oil flowing directly from the Caspian to China would not be in Russia’s strategic interest. The US can capitalize on this notion and strike a deal with Russia about the future transportation of oil from the Caspian. A multiple pipeline strategy could again be the best solution: part of the oil could be shipped through Russia, potentially using bypassing pipelines from the Black Sea to South European ports, and another part through the Caucasian energy corridor. Such an arrangement might induce Russia to pursue a more cooperative policy toward the countries of the South Caucasus, and could ease pressure on Georgia and Azerbaijan. 

The development of closer ties with India might be a good incentive for the United States to support one of the southeastern-oriented options. This will greatly depend, however, on whether a ‘Sino-Islamic alliance’ evolves, and whether the US will manage to curtail its development. With China’s substantial influence in Pakistan, Iraq and Syria, solidifying ties with Iran would create an entire and uninterrupted allied land-space from Syria on the Mediterranean to China on the Pacific. If this geopolitical alignment becomes a reality, the U.S., India, and potentially Russia may work hard to prevent it.

AUTHOR BIO: Mamuka Tsereteli is the executive director of the US-Georgian Business Council.

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