The Caspian Sea Convention – the fallout on the SGC and Turkey’s ambitions to act as the regional hub

The Caspian Sea Convention – the fallout on the SGC and Turkey’s ambitions to act as the regional hub

caspian sea meeting

After a 27-year dispute, the Caspian littoral states are finally set to resolve the Caspian Sea status. This should allow, among other things, the construction of trans-Caspian oil and gas infrastructure. Whether the expectations will translate into immediate actions and projects is yet to be seen, but after August 12th, when the heads of state of Russia, Kazakhstan, Azerbaijan, Turkmenistan and Iran convene in the Kazakh port of Aktau to sign the Caspian Sea Convention, the media will overflow with hype and big headlines.


The convention determines the legal status of the Caspian Sea in greater detail for oil and gas exploration, production and transportation than what was adopted in the November 2003 Framework Convention for the Protection of the Marine Environment of the Caspian Sea. The current act was preceded by bilateral maritime delineation agreements between the littoral states – with Iran being the last to acquiesce to the consensus.


The agreement was made possible by a shift in Moscow’s policy on the need to come to terms with its Caspian Sea neighbors, as obstruction to oil and gas transit projects – against the backdrop of the already operational Southern Gas Corridor – seemed to drive geopolitical costs without tangible benefits.


Why did Moscow change its mind?


First, there is the ongoing process between Russia and Turkey. Instead of confronting Turkey’s desire to consolidate oil and gas routes and act as a hub, Vladimir Putin decided to engage and help President Erdogan in his pursuits. Moreover, relations between the West and him marked a steady downward trajectory. Adding Turkish Stream to Blue Stream has not only allowed Russia direct and unimpeded access to the Turkish gas market, but has bestowed the Kremlin with a potent tool to undermine the key premise of Trans-Caspian pipelines — the entry of superseding Russian gas flows in oil and gas transit across Turkey. Ankara’s key strategy line as an indispensable pro-West gateway for Caspian and Middle Eastern energy resources has been somewhat diluted, following its flirts with Russian strategic weapon systems (the S-400), nuclear reactors and outbound transit for Russian gas flows via Turkish Stream.


Second, Russia retains its capacity to substantially delay the construction of any of the oil and gas ducts that will traverse the Caspian Sea by playing the environmental card. It could initiate environmental impact reviews and objections and revert to arbitration procedures that could take up to 10 years.


Third, most of the gas and oil fields in the Caspian Sea countries have reached production phase and are in dire need of access routes to the global oil and gas market. Investments exceeding $100 billion have either been made or committed by international energy majors, some of them partnering with Russian oil companies both in Russia and elsewhere. Continuing to deny them recovery of capital investment and market access would have jeopardized the Kremlin’s strategy to use the same EU companies as partners in warding off U.S. LNG in the EU gas market.


Fourth, the EU has been successful in linking Moscow’s dependence on Nord Stream-2 going forward with progress on the Trans-Caspian pipelines. The NS-2 project has entered the final leg, and Gazprom has been willing to appease its West European partners and start works ASAP. Even with the Caspian Sea convention signed, it will take many years before something of substance emerges as trans-Caspian infrastructure, while Nord Stream-2’s start is imminent, and removing barriers will bear immediate effect.


Fifth, there is some sobering up in Russia’s top circles on the strategic merit of energy deals with China, including the worth of not competing with projects, originating in Central Asia and Beijing’s refusal to prioritize Russia as an energy source. This has undermined a key premise in Russia’s foreign policy – that Moscow could engage Beijing in a global strategic partnership, including in the Caspian Sea Basin and Central Asia. Energy resources in Central Asia directly compete with the grand designs of the Altai and Power of Siberia gas export projects. This line in Chinese energy policy has been in part assisted by Moscow’s tacit support for eastbound export of energy resources from the Caspian Sea and Central Asia to China, rather than to Europe.


Coming to an agreement on the Caspian convention has required more than 50 sessions of the reconciliatory committees and 5 summits, as Iran has all along insisted on equitable distribution of the resources, regardless of offshore segment size.


Finally, the Caspian Sea summit was preceded by the signing of the Environmental Impact Assessment Protocol (EIAP, which will make all five littoral states equal partners, allowing all of them to voice concerns and seek international arbitration in the event of discords.


The status of the Caspian Sea and the pipeline projects fell into a legal vacuum after the collapse and the disintegration of the Soviet Union. The 1921 and 1940 agreements — the Russo-Persian Treaty of Friendship — between the USSR and Iran were unable to regulate the relations between the littoral states and even less so the complex issues related to resource rights allocation.


With almost 18 trillion cubic meters in reserves, Turkmenistan’s gas access to the EU market could seriously compete with Russia, Norway and global LNG. Kazakhstan’s newly developed oil fields, in turn, could add to global crude oil supply — the Kashagan field alone could add over 350,000 barrels a day to the 570,000 barrels from the Tengiz fields.


Azerbaijan’s hopes are no less ambitious in view of the new fields in the Araz-Alov-Sharg, Serdar/Kapaz and Azeri-Chirag-Guneshli oil fields. Baku hopes that the Caspian Sea Convention will resolve the jointly filed resource sharing issues, and its role as a transit country will be reinforced.


Russia will continue to hold strong cards in the Caspian Sea game as 2/3 of Turkmen gas exports already go into Gazprom’s system, allowing it to export more gas to Europe. Also, transit sales to Ukraine of Turkmen gas have been suspended after the annexation of Crimea. There is little hope that the dispute will be settled in the WTO court anytime soon.


The Turkish and Nord streams allow Moscow, in the extreme case – just for the sake of undermining the Trans-Caspian pipeline – to offer Ashgabat alternative transit routes via Russia, instead of those via Azerbaijan. On top of that, Turkmenistan faces difficulties meeting commitments to deliver gas to China. By 2020, the export volumes should exceed 35 billion cubic meters. Therefore, it would inevitably have less gas to export to the EU market.


The case for the Caspian Sea as an energy source impacting global demand also rests on the premise of Turkey acting as reliable and trustworthy intermediary between the West and the Caspian Sea countries. In recent months, the new heights in Ankara’s anti-Western rhetoric seriously erode trust in Turkey as an honest broker. Moreover, Erdogan’s energy games with Moscow, shatter a key assumption of oil and gas majors developing the Caspian fields – that they will not need to compete with Russian gas in the transit infrastructure of the Southern Gas Corridor. Instead of offering the SGC to be an exclusive corridor for Caspian energy resources, Turkey has opened a battlefield for competing energy transit flows from Russia, the Caspian and the Middle East. The issue is not solely geopolitical; it has direct negative implications on the recovery of capital invested in oil fields and infrastructure.


Ankara has chosen to remain silent and work at both ends – the West and Russia. However, this approach has consequences. Turkish Stream-2 could be the first to experience the cost of the duplicity in Turkish foreign policy. In the old days, Ankara’s good relations with the West acted as a decisive bargaining chip in relations with Russia. The crisis in Turkey-West relations has removed this asset and turned it into a liability.


When looking back, Ankara’s Caspian strategy that used to substantiate the existence of the Southern Gas Corridor and the huge investments in the Shah Deniz field has lost relevance in line with developments in Turkey. The West has turned to the East Med as an alternative source, including the LNG markets.


Turkey may not be the only net loser in the Caspian Sea interplay. All countries that chose to ignore geopolitical connotations and pinned hopes on transit via Turkey and the add-on extension of Russian gas transit infrastructure are likely to join the loser’s club.


By Ilian Vassilev

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