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OEO-ECONOMICS
Ibrahim GULIEV
D.Sc. (Geology and Mineralogy), Professor, Academician of the National Academy of Sciences of Azerbaijan, deputy director of the Institute of Geology, Azerbaijani National Academy of Sciences, editor-in-chief of the journal The Azerbaijani Oil Industry
(Baku, Azerbaijan).
HYDROCARBON RESOURCES OF THE CASPIAN REGION IN THE GLOBAL ENERGY SUPPLY SYSTEM
Abstract
This article looks at the state of the hydrocarbon resource base of the Caspian region in the context of the author’s and other expert evaluations.
It shows the significant hydrocarbon potential of the region as compared to the world’s most important oil-bearing areas.
I n t r o d u c t i o n
The end of the 20th-beginning of the 21st centuries have shown that the discovery of one gigantic oil field can affect a state’s destiny and evolution more than all other factors put together. In this respect, during the past 200 years the Caucasus has been and remains today in the epicenter of the world processes. This is primarily due to the discovery and operation of oil fields on the Absheron Peninsula, as well as in the Grozny and Stavropol regions.
At the turn of the millennium, the Caspian region found itself in the center of world geopolitics once more. The discovery of gigantic fields, such as Astrakhan, Tengiz, Kashagan, Shakh-Deniz, and
Azeri-Chirag-Gunashli, has positioned the Caspian region as the largest raw material base of world class hydrocarbons for the next decade, with all the ensuing consequences. The problems of producing, transporting, refining, and selling oil and gas have shifted from the technological to geopolitical area.
Some Development Trends in the Global Oil and Gas Industry
The time of absolute hegemony of hydrocarbons in the history of civilization is coming to an end. Optimists assure us that there is nothing to worry about for the next 30-40 years, but more informed and so more cautious people reduce this figure to 10-15 years. According to the data of the International Energy Agency, oil production in the world is constantly shrinking at 580 of the 800 large oil fields. In the past decade, the world produced more than double the amount of hydrocarbons than is contained in the newly discovered fields. The discovery of new fields is becoming an increasingly rare phenomenon and they are ever smaller in size. In the last decade, the largest fields were discovered in Iran, Russia, Azerbaijan, and Brazil. The peak of discovery of large fields fell to 1961-1975. But according to several experts, the crisis will come before industrially significant oil reserves end. For the world economy to falter, it is enough to experience a more or less extensive shortage of hydrocarbons, primarily oil, or limited access to it. If the price for oil rises higher than a certain threshold, the consequences could be extremely grievous.
Despite the obvious fact that hydrocarbon reserves are finite, there are two views on the prospects for developing oil and gas production in the world. The first is pessimistic and says that the peak of world production has already been reached and more than half of the world oil reserves have already been recovered. M. King Hubbert, a geophysicist who worked for the Shell Company, predicted back in 1956 that U.S. oil production would peak at the beginning of the 1970s and decline thereafter. His predictions were scoffed at then but his analysis has since proven to be extremely accurate. It is a well-known fact that when a new field is first discovered there is a rapid growth in oil production volumes during the recovery of the most accessible and, consequently, cheapest oil. As the field undergoes further development,
■ first it experiences natural depletion and,
■ second, oil production becomes increasingly expensive.
The oil produced at this field loses its competitiveness compared with production at other fields and its volumes gradually begin to decline. The bell curve that depicts oil production dynamics has been called the Hubbert Peak.
Colin Campbell, the author of The Coming Oil Crisis, presented data several years ago showing erroneousness of some optimistic predictions made by several international organizations about the time limits for complete development of the world’s proven oil reserves. Campbell accused governments, representatives of the industry, and the scientists of several countries of their obvious lack of desire to recognize the importance of this problem. According to most experts, world oil production could reach its peak in the next decade and then go into decline. According to Kenneth Deffeyes, a professor at Princeton University and author of The View from Hubbert’s Peak, world oil production could reach its peak as early as the middle of this decade. The second viewpoint is optimistic. According to a report by the American Center of Geological Research, world oil production will not reach its peak for another few decades. The latest World Energy Outlook forecast by the International Energy Agency says that the current oil reserves will last the
world until at least 2020. One of the leaders of the largest oil-producing companies in the world, Exxon-Mobil, is even more optimistic. He believes that there will be no shortage in the world oil market for another 70 years.
Expert Assessments of the Hydrocarbon Potential of the Caspian Region
The appearance of the Caspian region as a new prospective world-class region has aroused immense interest against the background of largely pessimistic predictions about the fate of the oil industry and the desire of transnational monopolies to protect themselves against dependence on the Middle East countries. The intrigue regarding evaluations of the Caspian region’s hydrocarbon potential began at the end of last century when Russian experts, on the one hand, and Western, on the other, presented diametrically opposite assessments that differed by almost an order.1
It is paradoxical that in contrast to the general governing law whereby a region’s resources grow as the state of exploration improves, according to the data of the official Soviet structures, the opposite was seen in the Caspian region. As seismic exploration of the basin in the Southern Caspian increased, there was a steady decrease in the assessments of the size of its potential, which declined by more than 16% during this period.2
Table 1
Official Quantitative Assessments of Proven Hydrocarbon Reserves of the Caspian Sea (1979-1989)3
Period of assessment Oil, million tons Condensate, million tons Gas, bcm Total toe, million tons Total length of seismic profiles, thou. km
01.01.1979 5,650 — 4,450 10,100 10
01.01.1984 3,230 684 5,821 9,735 130
01.01.1989 3,236 590 4,535 8,360 195
According to the assessments made right before the Soviet Union collapsed, the total hydrocarbon resources of the Caspian Sea were divided between Azerbaijan (33%) and Kazakhstan (35%), while Turkmenistan and Russia accounted for 18% and 14% of all the resources, respectively. As for distribution of the proven reserves, Azerbaijan and Turkmenistan accounted for approximately 97.5% (87% and 10.5%, respectively) and the Russian Federation for about 2.5%. Not one field containing hydrocarbon in-place reserves was found in the waters contiguous to Kazakhstan.
1 See: A. Konoplianik, Kaspiiskaia neft na Evraziiskom perekrestke, Institute of Geology and Development of Fossil Fuels, Moscow, 1998, p. 140.
2 See: I.F. Glumov, Ia.P. Malovitskiy, A.A. Novikov, B.V. Senin, Regionalnaia geologiia i neftegazonosnost Kaspiiskogo moria, Nedra-Biznestsentr, Moscow, 2004.
3 Ibidem.
Table 2
Distribution of Hydrocarbon Reserves and Resources in the Areas of the Caspian (1989-1991) (million tons)4
Category Azerbaijan Turkmenistan Kazakhstan Russia Throughout the CIS water area
Proven reserves (A+B+C1+C2) 1988-1991 1,012.2 24.7 107.0 880.5
Official assessments of resources (A+B+C1+D) 1988-1991 8,360.0 1,150.0 2,950.0 1,500.0 2,760.0
More active prospecting at the beginning of 1994 led to a significant increase in the amount of new information. This was promoted by the mass use of new modifications of seismic survey. Specific data about wells appeared, making it possible to shed light on the structure and composition and make adjustments to well and geophysical data. The large amount of new information, difference in methods for assessing resources and reserves, and, frequently, confusion in classifications and terminology led to the appearance of great variations in today’s expert assessments of the hydrocarbon potential of the Caspian Sea.
As the analysis conducted by experts from the Russian Academy of Sciences’ Institute of World Economy and International Relations and Institute of Geology and Development of Fossil Fuels shows, present-day assessments of recoverable reserves of oil in the Caspian Sea fluctuate within the range of 4-6 billion tons of oil equivalent (toe) and of total hydrocarbon resources within the range of 30-60 billion toe.5
The highest assessments were made in 1997 in a report by the State Department to U.S. Congress. With respect to the individual sectors of the Caspian Sea, the data are also quite high. In particular, Kazakhstan’s water area could contain between 9 and 15 billion toe and the Turkmen section, 12.21 billion tons, including 6.74 billion tons of oil and 5.47 tcm of gas.6
One of the latest assessments was made by the author and his Russian colleagues, Professor D.L. Fedorov, former minister of geology and natural resources, and Professor L.E. Levin, a well-known specialist in forecasting oil- and gas-bearing capacities, in the monograph Hydrocarbons Potential of the Caspian Region, which came out in Russian and English. Using a new method, the work presents renewed assessments of the initial recoverable resources.7
Let us take a look at the individual sectors of the Caspian Sea keeping in mind our assessments and other expert evaluations available in the literature.
4 Ibidem.
5 See: A. Konoplianik, op. cit.
6 See: Report on the Caspian Sea Region of the EIA Energy Information Administration, 26 October, 1997; 30 December, 1998.
7 See: I.S. Guliev, L.E. Levin, D.L. Fedorov, Uglevodorodnyi potentsial Kaspiiskogo regiona, Nafta-Press, Baku,
2003.
Table 3
Distribution of Potential Hydrocarbon Resources in Paleozoic-Quaternary Deposits among the Oil- and Gas-Bearing Basins and State Sectors, Continent, and Sea
(billion tons)8
State Sectors Continent Sea TOTAL
South Caspian Basin
Azerbaijan 9.0 15.0 24.0
Turkmenistan 4.0 7.0 11.0
Iran 2.0 5.0 7.0
Total throughout the basin 15.0 27.0 42.0
Central Caspian Basin
Azerbaijan — 3.0 3.0
Turkmenistan — — —
Russia 6.0 5.0 11.0
Kazakhstan 2.0 4.0 6.0
Total throughout the basin 8.0 12.0 20.0
North Ustiurt Basin
Russia — — —
Kazakhstan 3.0 1.0 4.0
Total throughout the basin 3.0 1.0 4.0
North Caspian Basin
Russia 6.0 — 6.0
Kazakhstan 6.0 12.0 18.0
Total throughout the basin 12.0 12.0 24.0
Total in state sectors
Russia 12.0 5.0 17.0
Kazakhstan 11.0 17.0 28.0
8 Ibidem.
Table 3 (continued)
State Sectors Continent Sea TOTAL
Azerbaijan 9.0 18.0 27.0
Turkmenistan 4.0 7.0 11.0
Iran 2.0 5.0 7.0
TOTAL 38.0 52.0 90.0
Russian Sector
In 1999, a large oil and gas condensate field, Khvalynskoe, was discovered in an area containing geological resources amounting to 250-300 million toe. Two subsequent wells drilled further to the north, on the Shirotnoe elevation, also led to the discovery of an oil and gas condensate field (named after Iu. Korchagin) with preliminary geological reserves of approximately 180 million toe.9
The discoveries made by the first wells in two promising areas and the subsequent discoveries of oil accumulations on the “170 km,” Rakushechnoe, Sarmatskoe, and Tsentralnoe elevations confirmed the sector’s high oil and gas prospects. It was also possible to make an expert evaluation of the forecast hydrocarbon resources of the Russian sector totaling more than 7 billion toe. The evaluations of experts from the Ministry of Natural Resources and Ministry of Energy based on these results and other data of thematic and field studies in the northwest water area give slightly lower, but close values of the forecast and prospective geological resources of the sector within the range of 5.4-5.6 billion tons of hydrocarbons.10
Kazakh Sector
In May 2000, drilling of the first exploratory well in Eastern Kashagan was completed. Good quality oil was obtained at a depth of around 5,170 m with a flow rate of 512.8 t/day and gas with a flow rate of 199,000 cubic meters/day. The field’s total geological reserves, according to the assessments of the Kazakhoil National Oil Company, amount to 1.7 billion toe. An exploratory well in the Western Kashagan area produced oil with a flow rate of 463.7 t/day, as well as 215,000 cubic meters/ day of gas, at a depth of 4,250 m.11 This was followed by a series of failures in prospecting in the Kazakh sector of the Caspian (the Tiub-Karagan, Atash, and Kurmangazy structures). And not until recently did representatives of the KazMunaiTeniz Offshore Oil Company unofficially report on a successful result obtained during exploration at the Auezov field under the Zhemchuzhina (Pearl) project.
During the first test using an Astra jackup floating drilling rig from Russia’s LUKoil Company, a flow of oil of 300 tons a day was obtained at a depth of 2,340 meters. Auezov, of course, is not Kashagan (which produces up to 1,500-2,000 tons of oil a day), but the obtained result is more than
9 See: I.F. Glumov, Ia.P. Malovitskiy, A.A. Novikov, B.V. Senin, op. cit.
10 Ibidem.
11 Ibidem.
THE CAUCASUS & GLOBALIZATION
the Caspian “Pearl” searchers expected. A decision was made to continue exploration at a depth of 1,850 meters where geologists and drillers hope to obtain much higher indices. Two small structures, Khazar-1, Khazar-2, also seem promising, although their forecast resources are not high. On the whole, Russian experts evaluate the geological resources of the Kazakh sector of the shelf at between 7.5 billion and 8.1 billion toe.12
Turkmen Sector
According to the data of the Turkmenistan Petroleum Industry (Turkmenistan, 2000), between 1996 and 1998 approximately 16,000 km of new seismic cross sections were processed on the Turkmen shelf. This work provided better information about the geological structure of the Turkmen sector, which made it possible to reach more justified conclusions about the region’s potential. Official sources in Turkmenistan gave high assessments of the potential of the Turkmen shelf (12.2 billion toe, see above).13
Iranian Sector
Information on the state of the resource base in the Iranian sector of the Caspian is extremely scanty. According to the assessments of Iranian experts, preliminary seismic surveys of this part of the basin showed that up to 1.6 billion toe of (or approximately 0.4 billion toe of recoverable) resources could be concentrated here. This assessment is essentially the same as one of the Russian experts made earlier regarding the Iranian sector—1.5 billion toe.14
Azerbaijani Sector
The discovered Gunashli, Azeri, and Chirag fields located in the Absheron-Balkhash zone of the Caspian have been a good basis for developing intensive prospecting in the Azerbaijani sector of the Caspian. Azeri and Western experts estimated the recoverable reserves of the Azeri-Chirag-Gu-nashli mega structure at more than one billion toe.15
The Shakh-Deniz structure was first delineated by Azeri geologists in 1954. Subsequently, the SOKAR Azerbaijani Oil Company drilled two wells of 5,500 m in depth, but stopped drilling for financial and technical reasons. In 1998, the Azerbaijani international operational company began drilling a new well at a water depth of 135 m using a semi-submersible drilling platform, Dede Gorgud. According to the results of drilling and subsequent work, the Shakh-Deniz field contains more than 1,000 bcm of gas and 350 million tons of condensate.16 Along with this and other doubtless achievements, several wells proved commercially unprofitable.
During the development by Western oil companies of the resources of the Southern Caspian, prospecting works were carried out in 14 areas and results were obtained in 12 areas, only three of
12 See: I.F. Glumov, Ia.P. Malovitskiy, A.A. Novikov, B.V. Senin, op. cit.
13 Ibidem.
14 Ibidem.
15 See: I.S. Guliev, L.E. Levin, D.L. Fedorov, op. cit.
16 Ibidem.
which (Garabakh, Ashrafi, and Shakh-Deniz) proved to have reserves of industrial oil and gas. The success of the exploration in terms of the number of productive traps identified thus amounted to 25%. In these areas 19 wells were drilled, 17 of which have been brought up to the level of project facilities and in 6 of which an industrial product has been obtained. Based on this, the success of the exploration in terms of number of productive wells amounts to approximately 35%.
The success of the exploration in the Russian sector of the Caspian Sea proved much higher than in the Azerbaijani and Kazakh sectors.
Oil Roulette
The relatively low success ratio and high degree of economic risk associated with the extremely high exploration expenses, which sometimes reach 100 million dollars for one offshore area of the Caspian Sea, do not make the region’s prospects, at least in the Southern Caspian, very optimistic.
Relative failures always give rise to pessimism, primarily among managers in the energy industry. There are many such examples in the history of oil and gas production. We will remind you that the Leduc field in Canada was not discovered until the Imperial Company had unsuccessfully drilled 133 exploratory wells. The largest world companies drilled approximately 200 wells (“dry” or only with signs of gas) before the first large oil accumulations in the North Sea were discovered.
Oil and gas fields are rarely discovered after the first exploratory well is drilled. But a negative result in the first well is only perceived as the final answer for very simple and well-prepared facilities in the areas under exploration. In more complex areas, such as the Southern Caspian, the likelihood of discovering a field with the very first well is estimated at no more than 0.5%. An analysis of the efficiency of exploration in different areas of the Soviet Union over the long run has shown that less than 60% of the fields were discovered after drilling the first well, 75% after one or two, and almost 90% after one to three. There are isolated cases of industrially valuable fields being discovered after drilling the fifth or sixth wells. The distribution of the number of exploratory wells necessary for obtaining a negative conclusion on the oil- and gas-bearing prospects of a facility is approximately symmetrical (after the first well—48%, after one or two—71%, and after one to three—85%).
Risks can be reduced when searching for fields by means of deep drilling in two ways: by using the latest technology when preparing the facility for exploratory drilling by means of seismic survey or by carrying out a set of geological-geophysical studies and scientifically justified selection of a facility for exploration based on knowledge of the laws governing the location of hydrocarbon clusters in the area and of regional geological, geophysical, geochemical, and paleogeothermal data. The first way should ensure not only confidence in the availability of a trap (structural form), but also present the possibility of determining the optimal position of the first wells at the facility, as well as provide data on the existence of a collector and cap rock, which is now resolved with the help of additional processing and interpretation of geophysical data.
The second way calls for a preliminary evaluation of each facility based on its geological position in the oil- and gas-bearing or prospective basin in the regional respect, and not only in terms of the trap’s individual parameters. Risk-reducing efforts when looking for oil and gas can be extremely effective but do not completely eliminate the risks.
Despite the growing difficulties of further prospecting when new regions with difficult geographic conditions (which make drilling more expensive and risks during exploration inevitable) are reached, this work is being resolutely continued with a certain increase in volume.
The average spending on prospecting works by the world’s large oil companies amounts to approximately 700 million dollars a year, fluctuating in different companies from 470 to 1,150 million
THE CAUCASUS & GLOBALIZATION
dollars, which amounts to 12-32% of the spending on the development of previously discovered fields. This spending is stimulated by the fact that, according to geologists’ estimates, there are still 50-150 billion tons of undiscovered recoverable resources of oil and 150-200 tcm of gas in the world.17
Some Geopolitical Aspects
Our analysis confirms the high hydrocarbon potential of the Caspian region as a whole and of the Southern Caspian in particular. For example, in Azerbaijan (on land and offshore) more than one billion 400 million tons of oil and 450 bcm of gas have already been produced,18 and now the gigantic fields of Azeri-Chirag-Gunashli and Shakh-Deniz are being successfully operated. Russia, Kazakhstan, and Turkmenistan have great prospects. Recently it was announced that prospecting works had begun in the Iranian sector of the Caspian.
The analysis of prospecting works conducted makes it possible to claim that as of today there are at least several dozens of promising areas and facilities in the Caspian region, exploration at which will be characterized by low economic and technological risk. In this respect, the Caspian region can currently be regarded as a hydrocarbon base of world significance. Its current relatively small share in the world balance of resources does not determine its significance in the future, since the situation could dramatically change in the next decades.
Two main scenarios are possible. If there are no major discoveries of new fields in the Caspian in the next decade, the region will be assigned the role in world energy that the North Sea has played for the past 20 years. In itself this place in world energy guarantees stable development and gradual integration into the world economic community. If discoveries of giant and large fields continue and at least 30% of the region’s potential resources are realized, that is, recoverable reserves amount to more than 20 billion toe, other scenarios will be possible. The countries of the Caspian region will undoubtedly try to pursue their own oil policy, which will naturally arouse opposition among international transnational companies and states.
The struggle over the world’s last large oil and gas reserves is the main geopolitical intrigue of the 21st century. There are almost no oil regions left today in the world that are not seized by conflict. In addition to traditional Iraq, Iran, and the Caucasus, they include the Sudan, where trans-African pipelines could pass and large oil fields are being developed, Nigeria, the Horn of Africa, Bolivia, Myanmar, and Indonesia. There is also unrest close to the Algerian oil and gas pipelines going to Europe, in the Mozambique Channel (where many islands belong to France), and in the Angolan enclave of Cabinda. The countries of Southeast Asia and China have been disputing for several decades now over who the bed of the South China Sea belongs to. The same conflicts are going on between Japan and China and both Koreas. Nor can we forget the disputes that flared up recently over possession of the Arctic shelf. The list can go on.
Thousands of pipeline kilometers will be built throughout the world in the next 10-15 years. And all of this is designed to transport oil as quickly as possible from Western to Northern or Eastern Africa, let’s say, or from the Caspian to the Persian Gulf and Europe, the Indian Ocean and even the Pacific Ocean (including via Afghanistan and China). There are also plans regarding transnational control of pipelines, whereby for years ahead, with respect to many countries, including the new gas arteries from the south and southeast of the former Soviet Union to Europe, from the Kurdish and other regions of Iraq, and from the African Mediterranean.
17 See: “Koeffitsient udachi,” NeftRossii, No. 3, March 1999, available at [http://www.oilru.com/nr/51/82/].
18 See: “Istoriia nefti i gaza,” Neftegazovaia vertikal, Issue 8, 2006, available at [http://www.ngv.ru/article.aspx? articleID=21658].
C o n c l u s i o n
In the global economy, energy security means more today than simply protecting fields, refineries, and pipelines from terrorist acts. The world is facing the prospect of divvying up energy resources anew, so far it is a cold war among those who have energy resources and those who do not have enough. In this sense, hydrocarbon resources are being used as a “political bargaining chip” and this capital must be used with great care and perspicacity. The countries of the Caspian region, including Azerbaijan, are succeeding in this so far.
The positive side of having enormous resources is primarily accelerated integration into the world economic and financial system, technological rearming of the basic industries, and investment of significant funds into science, technology, and education.
Rozeta ASATIANI
D.Sc. (Econ.), professor, Tbilisi Institute of Market Economy and Law
(Tbilisi, Georgia).
POST-COMMUNIST TRANSITION PERIOD IN THE GEORGIAN ECONOMY
Abstract
T
his article analyzes the initial conditions and mechanisms of the postcommunist transition period and ex-
amines the specific features and stages of economic reforms in Georgia in 19912008.
I n t r o d u c t i o n
The breakup of the U.S.S.R. and the related serious changes in the global political and economic space confronted the post-communist countries with the need to address a complex and unusual task unprecedented in world history: the task of transition from the command economy to a market economy. In Georgia, as in other countries of the Central Caucasus,1 the Soviet period is also known as the time of a 70-year socialist experiment.
The Soviet Union was a country with dominant state ownership (90%) and a rigid vertical structure of administrative command, with a dictatorial regime and disrupted horizontal relations. The
1 See: E. Ismailov, V. Papava, The Central Caucasus: Essays on Geopolitical Economy, CA&CC Press, Stockholm, 2006.
