IT is hard to think of an industry that has a hype machine as phenomenal as the potential Caspian energy industry. Ever since the disintegration of the USSR in 1991, the Caspian Basin has been touted as one of the world's largest new energy sources. This was partly because the region had been off-limits to the West for so long that its potential was genuinely unknown. In addition, the political instability in the Persian Gulf had underscored the need to find dependable energy resources outside the Middle East. As a result, the premise of an 'enormous' Caspian energy wealth was invented as a justification for geopolitical manoeuvres by Western powers to fill the strategic void left in the region after the Russian withdrawal.

But it is now becoming increasingly clear that the hydrocarbon deposits in the Caspian Basin are much lower than has been believed in the West, that the Caspian's energy promise has been deliberately exaggerated and that production from the area will never make a major contribution to the world's energy security. Whatever the final size of reserves, it is now obvious that much of the talk of Caspian oil was a spectacular bluff. When the late Azeri president Heydar Aliev painted a majestic picture of the Caspian energy potential at the 2001 World Economic Forum in Davos (Switzerland), his Armenian counterpart, Robert Kocharian, famously retorted: 'Is there any water in the Caspian, or is it only oil?'

As the Canadian researcher Robert Cutler once observed, the Caspian oil rush was akin to a high-stakes game of cards. It was complicated further by the fact that the cards were being played within another strategic game of chess, with other rules, played by the great powers at a large geopolitical chessboard. With a relative consolidation of the chessboard into patterns, at least temporarily, the Caspian oil game is now more or less settled. Although the bluffing survives from the old days of the card game, strategy as opposed to tactics has become the conditioning environment in the region, as in a chess game.

Instead of the politically bloated appraisal of 200 billion barrels in ostensible Caspian oil deposits (compared with Saudi Arabia's 262 billion) valued at 4 trillion US dollars, exuberantly cultivated for the past decade by the Department of State to justify its own strategy there, we are talking today of only 18 billion to 30 billion barrels, according to another US government agency, the Energy Information Administration (EIA). Estimates by the International Energy Agency (IEA) in Paris range from 17 to 32 billion barrels. As for natural gas, there is an agreement that proven reserves are about 6.5 trillion cubic metres, with Turkmenistan holding the largest deposits outside Russia.

Five major projects are currently underway in the Caspian Basin--four of which account for some 70 per cent of total reserves. These are the offshore Azeri-Chirag-Gunashli oil fields block and the Shah Deniz offshore gas field in Azerbaijan, Tengiz and Karachaganak onshore, and Kashagan offshore fields in Kazakstan. While other prospects exist, particularly in Kazakstan, they are not likely to make any major impact on regional production in the future. The famous old onshore oil fields around Baku, which in the early twentieth century produced half of the entire world oil production, are now exhausted, and new deposits have not been found.

All post-Soviet geological explorations have as yet failed to find sufficiently large new deposits, except for the Kashagan oil field in Kazakstan's sector of the sea discovered by the Italian state energy concern ENI. After drilling of many dry wells, the area that had been pushed by the US Department of State as an alternative to the Persian Gulf was dismissed latterly as a product of Washington propaganda.

Caspian Oil and Global Energy Needs

The industrial world is now looking for oil beyond the Middle East. The resources found in new areas will be critical to ensuring global energy stability. It is also understood that the petroleum demand will increase sharply and that oil import dependence will rise too. Indeed, according to the IEA, with a continued growth of the world economy by 3 per cent, its energy demand will increase at the rate of 2 per cent annually, meaning that the world will need 65 per cent more energy in 2020 than in 1995. 95 per cent of this additional energy demand will be met by fossil fuels--coal, oil and gas. In absolute terms, some 92 per cent of the total primary energy demand in 2020 will be fossil-fuel-based.

In recent years the Middle East OPEC (Organization of Petroleum Exporting Countries) countries have supplied 52-57 per cent of the world consumption. The most optimistic reserve estimates for Caspian oil pale in comparison with those for the Middle East, which holds over 680 billion barrels or some 60 per cent of the world's total (1147 billion barrels). Caspian reserves, which have been depleted over the past hundred years of intensive Soviet production, are certainly not another Persian Gulf or Siberia, and not even a new North Sea. The North Sea's oil reserves were 60-70 billion barrels (compared to Caspian's 18-30 billion), of which about 17 billion barrels still remain.

The combined Caspian output will never rival that of Saudi Arabia or Russia, which produce respectively 8.8 million and 7.1 million barrels of oil per day (mbd). The table below provides a comparison. Production in 2003 from all four Caspian countries amounted to 1.65 mbd, or about 2 per cent of the world's total production. Using the projected levels of production, the Caspian Basin is expected to contribute no more than 3 per cent to global oil supply by 2010, and even less thereafter.

Kazakstan, which holds 65 per cent of the Caspian Basin's oil reserves, is not even in this table. Thus, from an energy security perspective, the Caspian is not a source for diversification of global oil supplies, for it will remain only a small player on the world market. It can compete neither with the Middle East, nor with other marginal suppliers, such as Nigeria, which exports daily more crude oil than all Caspian producers together.

Besides, in terms of profitability, most estimators have concluded that a price of at least $20 per barrel is needed to justify the Caspian investment projects and, if the price fell below $20 a barrel, most Caspian oil consortia would no longer be profitable.

One of the differences that set the land-locked Caspian Basin apart from the North Sea and other marginal suppliers is the difficulty of getting the oil and gas production to world markets. The energy transportation systems of the Caspian region were originally designed and built to serve the strategic needs of the Soviet Union. Almost all oil and gas export pipelines inherited from the USSR pass through Russia. All other routing options are fraught with technical, financial, legal and political difficulties.

The proposed alternative pipelines must pass through--or take expensive detours to avoid--politically troubled mountainous areas where they could become targets for terrorists.

Additional risks originate from the fact that the Caspian states, still run by totalitarian-era leaders whose principal goal is to preserve their power, are all authoritarian, destitute and corrupt. With virtually all opposition prohibited and oil export revenues being siphoned off to the ruling elite's foreign bank accounts, the population at large have seen a decline instead of an improvement in their living standards during the professed 'oil boom' decade, and consequently the potential risks of political extremism and terrorism in this predominantly Muslim region are appalling.

The Purpose of Caspian Megalomania

There is now emerging a question as to whether the Caspian Basin is of major strategic importance, apart from all the oil-boom rhetoric of public statements. Is the Western interest in this peripheral region derivative of broader security and energy concerns, those having to do with the Middle East, Russia, Iran, China, and Islamic radicalism? Austere insights that challenge the big-oil policy there are not encouraged, and interlopers known for particular diligence in trying to ferret out facts even endanger their personal safety. If the Caspian oil reserves are not so extensive, why is it so essential for the West to be there?

The first reason is geopolitical. In the so-called Silk Road Strategy Act of 1999, Transcaucasia represents an important geopolitical isthmus, linking the Black and Caspian Seas and providing the West with a 'silk road' to Central Asia. By reanimating the 'silk road', which would avoid passing through Iran (historically its integral part), Washington is trying to limit Russia's influence in the region, while at the same time restricting the number of potential allies for Tehran.