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© UHCBA Energy Institute UHCBA Energy Institute 11
Developing Energy ResourcesDeveloping Energy Resources in the Caspian: in the Caspian:
Soviet and Independence PeriodsSoviet and Independence Periods
S. Gürcan GülenS. Gürcan Gülen, Ph.D., Ph.D.
UNIVERSITY ofHOUSTON
BAUER COLLEGE of BUSINESS
ENERGYINSTITUTE
Second JointSecond JointUniversity of Houston – Oxford UniversityUniversity of Houston – Oxford University
ConferenceConferenceApril 19-21, 2001April 19-21, 2001
www.uh.edu/energyinstitutewww.uh.edu/energyinstitute
© UHCBA Energy Institute UHCBA Energy Institute 22
Soviet TimesSoviet Times
• In 1988, the U.S.S.R.In 1988, the U.S.S.R.– Was the world’s largest producer of oil (11.8 mb/d)Was the world’s largest producer of oil (11.8 mb/d)– Was the second largest exporter of oil in the world Was the second largest exporter of oil in the world
(4.1 mb/d)(4.1 mb/d)– Was the world’s largest producer of natural gas Was the world’s largest producer of natural gas
(817 bcm a year)(817 bcm a year)
• Russian Republic accounted for 91% of oil Russian Republic accounted for 91% of oil and 65% of gas production.and 65% of gas production.
• The Caspian countries accounted for 8% of oil The Caspian countries accounted for 8% of oil and 12% of gas production.and 12% of gas production.
© UHCBA Energy Institute UHCBA Energy Institute 33
After the CollapseAfter the Collapse
• Along with many other industries, the oil & gas Along with many other industries, the oil & gas sector contracted. sector contracted.
• Caspian countries wanted to support their Caspian countries wanted to support their economic independence from Russia based on economic independence from Russia based on oil and gas export revenues.oil and gas export revenues.
• But, the interdependent Soviet economic But, the interdependent Soviet economic network (especially in the oil & gas sector) network (especially in the oil & gas sector) posed challenges.posed challenges.
• There are stories of relative success as well as There are stories of relative success as well as of consistent disappointment in Caspian of consistent disappointment in Caspian countries’ efforts.countries’ efforts.
© UHCBA Energy Institute UHCBA Energy Institute 44
But, First…But, First…
• In order to have the right perspective on In order to have the right perspective on the issues faced by the Caspian the issues faced by the Caspian countries, let us look into some countries, let us look into some numbersnumbers– ReservesReserves– ProductionProduction– ConsumptionConsumption
© UHCBA Energy Institute UHCBA Energy Institute 55
Reserves (end of 1999)Reserves (end of 1999)
0
100
200
300
400
500
600
700
800
900
OPEC S. Arabia Iran Russia U.S. N. Sea Caspian
bill
ion
ba
rre
ls
0
250
500
750
1000
1250
1500
1750
2000
2250
trill
ion
cu
bic
fe
et
OilGas
Source: Source: BP World Energy BP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 66
ReservesReserves
• 1.6 percent of World’s Oil1.6 percent of World’s Oil
• 5.0 percent of World’s Gas5.0 percent of World’s Gas
• After 12-3 years of investment, After 12-3 years of investment, more gas, but not much oil is more gas, but not much oil is found! (Kashagan pending)found! (Kashagan pending)
© UHCBA Energy Institute UHCBA Energy Institute 77
Reserves (end of 1999)Reserves (end of 1999)
0
1
2
3
4
5
6
7
8
9
Azerbaijan Kazakhstan Turkmenistan Uzbekistan
bil
lio
n b
arre
ls
0
20
40
60
80
100
120
tril
lio
n c
ub
ic f
eet
Oil
Gas
Source:Source: BP World EnergyBP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 88
Production & Production & Consumption of OilConsumption of Oil
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Azerbaijan Kazakhstan Turkmenistan Uzbekistan
mill
ion
ba
rre
ls a
da
y
ProductionConsumption
Source:Source: BP World EnergyBP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 99
Production & Production & Consumption of GasConsumption of Gas
0
1
2
3
4
5
6
Azerbaijan Kazakhstan Turkmenistan Uzbekistan
bill
ion
cu
bic
fe
et
a d
ay
ProductionConsumption
Source:Source: BP World EnergyBP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 1010
Production & ExportsProduction & Exports
• 1.7 percent1.7 percent of World’s Oil of World’s Oil• Only about 150,000 b/d exported Only about 150,000 b/d exported
outside FSUoutside FSU• Saudi Arabia alone has more Saudi Arabia alone has more
spare capacity!spare capacity!• 3.2 percent3.2 percent of World’s Gas of World’s Gas• Almost no exports outside FSUAlmost no exports outside FSU
© UHCBA Energy Institute UHCBA Energy Institute 1111
Now, challenges..Now, challenges..
• Oil & gas production fell significantly after the Oil & gas production fell significantly after the break-up becausebreak-up because– Centrally-managed production quota system of the Centrally-managed production quota system of the
Soviet timesSoviet times• Failure to maintain equipment & fieldsFailure to maintain equipment & fields• Poor reservoir managementPoor reservoir management• Excessive drilling & floodingExcessive drilling & flooding• No access to modern technologiesNo access to modern technologies
– Persistent problems after the break-upPersistent problems after the break-up• No adequate management systemNo adequate management system• Continued reliance on the administrative systemContinued reliance on the administrative system• No incentivesNo incentives
© UHCBA Energy Institute UHCBA Energy Institute 1212
Index of Oil Production Index of Oil Production (1989=100)(1989=100)
50
60
70
80
90
100
110
120
130
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Azerbaijan
Kazakhstan
Russia
Turkmenistan
Total
Source:Source: BP World EnergyBP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 1313
Index of Gas ProductionIndex of Gas Production(1989=100)(1989=100)
0
20
40
60
80
100
120
140
160
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Azerbaijan
Kazakhstan
Russia
Turkmenistan
Uzbekistan
Total
Source:Source: BP World EnergyBP World Energy
© UHCBA Energy Institute UHCBA Energy Institute 1414
..on the demand side..on the demand side
• Energy has been wasted and continues Energy has been wasted and continues to be used wastefully:to be used wastefully:– Subsidized pricing of energy.Subsidized pricing of energy.– Non-payments by users.Non-payments by users.
© UHCBA Energy Institute UHCBA Energy Institute 1515
Energy Intensity Energy Intensity (Btus per $ of GDP)(Btus per $ of GDP)
19831983 19901990 19921992 19981998
U.S.S.R.U.S.S.R. 59,37859,378 64,01364,013
AzerbaijanAzerbaijan 129,644129,644 102,020102,020
KazakhstanKazakhstan 99,69199,691 77,06277,062
RussiaRussia 70,61670,616 74,19874,198
TurkmenistanTurkmenistan 57,85057,850 111,709111,709
UzbekistanUzbekistan 83,01783,017 88,90688,906
73,47973,479 75,68575,685
U.S.U.S. 16,57716,577 14,64514,645 14,62814,628 13,41013,410
FranceFrance 7,9657,965 7,3957,395 7,7377,737 7,3907,390
JapanJapan 6,6866,686 6,2346,234 6,1846,184 6,5526,552
Source:Source: Energy Information AdministrationEnergy Information Administration
© UHCBA Energy Institute UHCBA Energy Institute 1616
Per Capita Energy Per Capita Energy Consumption (MMBtus)Consumption (MMBtus)
19831983 19901990 19921992 19981998
U.S.S.R.U.S.S.R. 184184 209209
AzerbaijanAzerbaijan 132132 6464
KazakhstanKazakhstan 203203 121121
RussiaRussia 235235 177177
TurkmenistanTurkmenistan 7272 5656
UzbekistanUzbekistan 7878 7777
208208 153153
U.S.U.S. 313313 337337 335335 351351
FranceFrance 144144 156156 164164 170170
JapanJapan 121121 148148 155155 168168
Source:Source: Energy Information AdministrationEnergy Information Administration
© UHCBA Energy Institute UHCBA Energy Institute 1717
Investment?Investment?
• Unattractive investment environment.Unattractive investment environment.– Concerns about rule of law.Concerns about rule of law.– Lack of world-class petroleum laws.Lack of world-class petroleum laws.– Lack of world-class regulatory frameworks, Lack of world-class regulatory frameworks,
including an independent regulator.including an independent regulator.– Lack of tariff structures.Lack of tariff structures.
• In short, no clear and transparent In short, no clear and transparent process!process!
© UHCBA Energy Institute UHCBA Energy Institute 1818
Legal & Regulatory Legal & Regulatory EnvironmentEnvironment
AzerbaijanAzerbaijan KazakhstanKazakhstan TurkmenistanTurkmenistan UzbekistanUzbekistan
Petroleum Petroleum LawLaw
NONO PARTIALPARTIAL YESYES NONO
RegulationsRegulations NONO NONO YESYES NONO
Env’l LawEnv’l Law YESYES YESYES
One-stop One-stop ShopShop
NONO NONO YESYES NONO
Pipeline LawPipeline Law NONO NONO NONO NONO
Tariff RegsTariff Regs NONO YESYES NONO NONO
© UHCBA Energy Institute UHCBA Energy Institute 1919
AzerbaijanAzerbaijan
• Remains dependent on Russian & Georgian Remains dependent on Russian & Georgian pipeline and rail network for its exports!pipeline and rail network for its exports!– Not enough oil to justify new non-Russian main Not enough oil to justify new non-Russian main
export pipelines.export pipelines.
• Infrastructure from Soviet times crumbling.Infrastructure from Soviet times crumbling.• Difficulty of getting equipment to Baku for Difficulty of getting equipment to Baku for
offshore activities.offshore activities.• Keeping Russia’s intentions in the region in Keeping Russia’s intentions in the region in
check.check.
© UHCBA Energy Institute UHCBA Energy Institute 2020
KazakhstanKazakhstan
• Remains almost fully dependent on Russian Remains almost fully dependent on Russian pipeline and rail network for exports.pipeline and rail network for exports.– Recently completed CPC pipeline appears dedicated to Recently completed CPC pipeline appears dedicated to
Tengiz, but runs through Russia.Tengiz, but runs through Russia.
• Cannot supply domestic refineries with domestic Cannot supply domestic refineries with domestic oil; needs to import Russian oil!oil; needs to import Russian oil!
• Refineries still use outdated Soviet technology Refineries still use outdated Soviet technology that was designed as part of the whole Soviet that was designed as part of the whole Soviet system.system.– Refineries cannot produce the products Kazakhstan Refineries cannot produce the products Kazakhstan
needs today!needs today!
© UHCBA Energy Institute UHCBA Energy Institute 2121
TurkmenistanTurkmenistan
• Turkmenistan is ready to export, but does not Turkmenistan is ready to export, but does not have a significant alternative to the Gazprom have a significant alternative to the Gazprom system.system.– Gazprom used to send its gas to hard currency Gazprom used to send its gas to hard currency
markets, while sending Turkmen gas non-paying markets, while sending Turkmen gas non-paying customers in Ukraine.customers in Ukraine.
• Turkey, a key market, appears staurated.Turkey, a key market, appears staurated.• Russia may need Turkmen gas!Russia may need Turkmen gas!• After Shah Deniz...After Shah Deniz...
© UHCBA Energy Institute UHCBA Energy Institute 2222
Caspian PipelinesCaspian Pipelines
© UHCBA Energy Institute UHCBA Energy Institute 2323
Happiness is Multiple Happiness is Multiple Pipelines?Pipelines?
PromotersPromoters
LengthLength
(miles)(miles)
Invest.Invest.
($ Bil.)($ Bil.)
Capacity Capacity (mb/d)(mb/d)
Tariff Tariff ($/b)($/b) MarketMarket
ChinaChina CNPCCNPC 21202120 1.51.5 0.30-0.400.30-0.40 33 ChinaChina
DruzbhaDruzbha RussiaRussia In useIn use 0.240.24 33 EuropeEurope
CPCCPC CPCCPC 940940 Oct 01Oct 01 0.56-1.340.56-1.34 2.8-3.42.8-3.4 Medit.Medit.
NovorossiyskNovorossiysk RussiaRussia 850850 In useIn use 0.160.16 2.122.12 Medit.Medit.
SupsaSupsa AIOCAIOC 550550 In useIn use 0.10-0.240.10-0.24 1.981.98 Medit.Medit.
CeyhanCeyhan 11251125 2.52.5 1.001.00 2.72.7 Medit.Medit.
KTI-GulfKTI-Gulf TotalTotal 15601560 4.54.5 1.001.00 3.4-4.13.4-4.1 AsiaAsia