U.S. expert: "Those playing Caspian Basin energy game may suffer from 'irrational exuberance'"

The Caspian Basin is now the scene of intense competition among the United States, Russia and China, which are all battling for control over natural resources and export routes. Maureen Crandall, an economics professor at the Industrial College of the Armed Forces at the National Defense University, said during a September 20 appearance in Washington that the Caspian Basin’s profit potential is probably exaggerated.

To support her contention she pointed to questions about the region's reserves of oil and gas. According to her own estimates, the entire region will be producing 3.6 million barrels of oil per day by 2015, and 3.36 million in 2020. Of that, Kazakhstan will be the largest supplier, and its production is projected to peak at about 2.5 million barrels per day. Her figures are significantly lower than official Kazakhstani estimates, which peg peak production at roughly 3.5 million barrels per day. "Saying it does not make it happen," Crandall said.

Turkmenistan is another country where reserves and production capacity are coming under question. The country currently produces about 60 billion cubic meters (bcm) of natural gas annually, of which roughly 75 percent is exported. Turkmen leader Saparmurat Niyazov has deals in place to ship 130 bcm of gas to China, Russia and elsewhere by 2009. Many experts believe Turkmenistan's reserves are not sufficient to meet these export commitments. Turkmenistan has not released the results of an independent audit of its energy reserves.

From a financial perspective, oil and gas extraction is not going to be as good a business proposition as some might have earlier expected, Crandall said. "I'm suggesting that because the investment climate has changed, this hype is unwarranted," she said. "Reality has caught up to the oil companies." She was a featured speaker in a discussion -- titled "Caspian Energy: Over Hyped and Under Risked?" -- jointly sponsored by the Central Asia-Caucasus Institute and the International Energy and Environment Program, both at the Johns Hopkins School for Advanced International Studies.

Crandall also has recently written a book on the same topic, Energy, Economics, and Politics in the Caspian Region: Dreams and Realities.

Her presentation was followed by a rebuttal by S. Frederick Starr, the chair of the Central Asia-Caucasus Institute. Starr generally agreed with the premise of Crandall's presentation and book. "Was this [energy speculation] over-hyped? I think that's fair to say," he said. But he went on to criticize her focus on the region's negative aspects. He argued that the oil-and-gas industry has brought benefits to the Caspian Basin.

He lauded Washington for always providing strong backing for construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline. The so-called "deal of the century" that created the BTC option was signed in 1994 during the Clinton administration.

Starr focused on Azerbaijan, saying the country's leadership deserves plaudits for using petro-profits to build housing for internally displaced persons, and for other infrastructure initiatives. Azerbaijan's State Oil Fund, according to official statistics, had over $288 million in expenditures during the first six months of 2006, of which $29.8 million, or just over 10 percent of the overall funds, was earmarked for infrastructure projects. "I think this is a responsible use of money," he said. He also noted that in Kazakhstan a middle class is rapidly developing, and poverty is falling as a result of oil and gas revenues.

"This is transforming the region [the Caspian Basin] ... their prospects have been transformed by the BTC pipeline already, and it's just begun," Starr said. "This is an extremely important development and it bodes extremely well for the prospects of stability and security in the region," he said.

Starr did not mention that corruption, fueled in large part by the oil-and-gas sector, remains a significant problem in the region -- something that could seriously undermine stability if left unchecked. According to the watchdog group Transparency International, Azerbaijan stands alongside Uzbekistan as among the most corrupt governments in the world. The corruption situation is even worse in Turkmenistan and slightly better in Kazakhstan.

Concerning Kazakhstan, the federal trial of an oil consultant accused of funneling millions of dollars to top Kazakhstani officials is scheduled to start this fall in New York.

Several experts have also expressed concern that Azerbaijan does not possess a strategic plan on how to use its windfall oil profits to promote stable long-term growth. Lacking a plan, Azerbaijan is vulnerable to Dutch disease, in which immense profits generated by the energy sector causes the collapse of a country's other economic sectors.

According to several articles published by Harper's Magazine earlier in 2006, the Central Asia-Caucasus Institute has received considerable funding from energy companies.

By Joshua Kucera, a Washington, DC,-based freelance writer who specializes in security issues in Central Asia, the Caucasus and the Middle East.

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