Developing Energy Resources in the Caspian: Soviet and Independence Periods

1. Second Joint University of Houston – Oxford University Conference April 19-21, 2001 UNIVERSITY of HOUSTON Developing Energy Resources in the Caspian: Soviet and Independence Periods BAUER COLLEGE of BUSINESS ENERGY INSTITUTE S. Gürcan Gülen, Ph.D. www.uh.edu/energyinstitute

2. Soviet Times • In 1988, the U.S.S.R. • Was the world’s largest producer of oil (11.8 mb/d) • Was the second largest exporter of oil in the world (4.1 mb/d) • Was the world’s largest producer of natural gas (817 bcm a year) • Russian Republic accounted for 91% of oil and 65% of gas production. • The Caspian countries accounted for 8% of oil and 12% of gas production.

3. After the Collapse • Along with many other industries, the oil & gas sector contracted. • Caspian countries wanted to support their economic independence from Russia based on oil and gas export revenues. • But, the interdependent Soviet economic network (especially in the oil & gas sector) posed challenges. • There are stories of relative success as well as of consistent disappointment in Caspian countries’ efforts.

4. But, First… • In order to have the right perspective on the issues faced by the Caspian countries, let us look into some numbers • Reserves • Production • Consumption

5. Reserves (end of 1999) Source: BP World Energy

6. Reserves • 1.6 percent of World’s Oil • 5.0 percent of World’s Gas • After 12-3 years of investment, more gas, but not much oil is found! (Kashagan pending)

7. Reserves (end of 1999) Source:BP World Energy

8. Production & Consumption of Oil Source:BP World Energy

9. Production & Consumption of Gas Source:BP World Energy

10. Production & Exports • 1.7 percent of World’s Oil • Only about 150,000 b/d exported outside FSU • Saudi Arabia alone has more spare capacity! • 3.2 percent of World’s Gas • Almost no exports outside FSU

11. Now, challenges.. • Oil & gas production fell significantly after the break-up because • Centrally-managed production quota system of the Soviet times • Failure to maintain equipment & fields • Poor reservoir management • Excessive drilling & flooding • No access to modern technologies • Persistent problems after the break-up • No adequate management system • Continued reliance on the administrative system • No incentives

12. Index of Oil Production (1989=100) Source:BP World Energy

13. Index of Gas Production(1989=100) Source:BP World Energy

14. ..on the demand side • Energy has been wasted and continues to be used wastefully: • Subsidized pricing of energy. • Non-payments by users.

15. Energy Intensity (Btus per $ of GDP) Source:Energy Information Administration

16. Per Capita Energy Consumption (MMBtus) Source:Energy Information Administration

17. Investment? • Unattractive investment environment. • Concerns about rule of law. • Lack of world-class petroleum laws. • Lack of world-class regulatory frameworks, including an independent regulator. • Lack of tariff structures. • In short, no clear and transparent process!

18. Legal & Regulatory Environment

19. Azerbaijan • Remains dependent on Russian & Georgian pipeline and rail network for its exports! • Not enough oil to justify new non-Russian main export pipelines. • Infrastructure from Soviet times crumbling. • Difficulty of getting equipment to Baku for offshore activities. • Keeping Russia’s intentions in the region in check.

20. Kazakhstan • Remains almost fully dependent on Russian pipeline and rail network for exports. • Recently completed CPC pipeline appears dedicated to Tengiz, but runs through Russia. • Cannot supply domestic refineries with domestic oil; needs to import Russian oil! • Refineries still use outdated Soviet technology that was designed as part of the whole Soviet system. • Refineries cannot produce the products Kazakhstan needs today!

21. Turkmenistan • Turkmenistan is ready to export, but does not have a significant alternative to the Gazprom system. • Gazprom used to send its gas to hard currency markets, while sending Turkmen gas non-paying customers in Ukraine. • Turkey, a key market, appears staurated. • Russia may need Turkmen gas! • After Shah Deniz...

22. Caspian Pipelines

23. Happiness is Multiple Pipelines?