Petroleum, Pipelines and Paranoia in the Caucasus

By Marshall I. Goldman, Associate Director, Russian Research Center, Harvard University
Source: International Conference on "International Law and the Chechen Republic", Cracow, Poland, Dec.1995

Disputes over petroleum deposits and pipelines have ruptured more than one harmonious international alliance. As Daniel Yergin in his book, The Prize, so clearly demonstrates, petroleum carries with it as many hazards as windfals.^*1 Petroleum discoveries have the potential to turn poor nations into rich ones but along the way the discoverers may have to ward off other claimants not only from the outsaide but as often as not from the insaide as well.

While it would be a distortion of history to claim that the struggle between Russia and Chechnya arises solely because of the of the jockeying for control of the Chechen oil deposits, refineries as well as the crucial pipeline which passes through Grozny, there is no doubt that petroleum has played a central role in the dispute. Given the potential of what seem to be vast untapped deposits in the Caspian Sea and the fact that the best if not only pipeline route from the Caspian through Russia to the West runs through Grozny, the odds are that tensions between Russia and Chechnya will not soon disappear. That will be the case even if constitutional matters dealing with regional rights and the integrity of the Russian Republic can be resolved.

The Caucasus region and Chechnya were among the first known producers of petroleum. The bible even contains references to petroleum products in the Baku region. Even Marco Polo alluded to a small 13th centuery export trade in oil soaked sand.^*2 The Turks, Persian and Russian jockeyed with each other for control of the region. Peter the Great actively sought to ship oil from the Caucasus north to Russia.^*3 subsequently however, Persia regained control and it was only after 1877 and the conclusion of the Russian Turkish war that Russia was able to exert its hegemony over Persia and Turkey and the various mountain tribes including in Chechanes.

Commercial exploitation of the region's oil occurred inthe early 1870s after the first two commercial oil wells were drilled. By 1898, Russia with oil from Baku and Grozny had become the world's output. It out produced the United States for three or four years until 1902 when new oil fields were discovered in Texas and the United States once again became the largest producer.^*4

Grozny began to extract oil from shallow wells in 1833 but its commercial development occurred only in 1893.^*5 At its pre-revolutionary high the Grozny region accounted for 18% of total Russian oil output. In the Soviet Era, output peaked in 1932 at 154,000 barrels per day (b/d) and contributed not quite 1/3 of the country's total production. Recognizing the importance of the region and its oil for his army and industry, Hitler made the conquest of Grozny and Baku a major priority. In the end he was unable to achieve his dream, but he came close.^*6 After the war, output in both Baku and Grozny continued to dimish so that by 1990 Chechnya was able to produce only 84,000 b/d. After the break up of The Soviet Union, there was a further drop so that by 1994, output amounted to only 28,000 b/d.^*7

Despite the drastic drop in output and shift of attention to new more prolific oil fields, particulary those in West Siberia, the Caucasus region nevertheless continued to play an important role. Output around Baku also fell but because of the areas early importance, a pipeline network was construced with Grozny at the hub with branches to Russia heading west , to Kazakhstan in the northeast, and to Baku in Azerbaijan from the south. The pipeline in turn led to the construction of an important oil refinery which was the sole source of the USSR's paraffin and a major producer of its high grade aviation fuel.^*8

With the growth of output in West Siberia, Moscow inevitably devoted more and more of its attention to that part of its petroleum empire. But with the break up of the Soviet Union in 1991 and the growing awareness by foreigners particularly American and British oil companies that there were major unexploited oil deposits in the Caspian Sea as well as in the nearby Tengiz fields in Kazakhstan, the region suddenly became the center of attention again. Russia, as well as the other newly independent republics began to allow for the possibility that they might need foreign technological help to exploit these potential deposits because existing Soviet technology was inadequate. In additio leaders in both Kazakhstan and Azerbaijan began to realize that the development of their oil reesources could provide them with the economic wherewithal to finance their independence from Russia. Moreover, all they were seeking to do was keep the prceeds from exploiting resources on their own territory. For 70 years the benefits had been diverted to Moscow because none of these regions had their own independence.

Similar arguments were made in Chechnya. The difference however, was that at least initialy, the Russians acknowledged the independence of Azerbaijan and Kazakhstan, but no such recognition was accorded to Chechans. Indeed when the Chechans unilaterally declared their independence in late 1991, Yeltsin sent in troops in an effort to squelch the uprising. The initial efforg failed and the Russians troops were called home. The Russians however continued to insisted that there could be no such thing as independence for Chechnya, and ultimately on December 11, 1994, a full fledged war began. In the meantime however the Chechans began to divert some of the oil output from their fields and the transit pipeline for their own use as well as for axport. Much of the wealth that accured to Chechnya came from the export of that oil. (In some cases oil claimed by the Chechans was exchanged for oil shipped elsewhere from Russia to the outside world.)

At first Russian authorities seem to accept this new reality. Even the unauthorized Chechan oil diversions from the pipeeline did not seem too upsetting. Gradually however the official attitude began to harden. This was the consequence of several developments. After the initial euphoria following the breakup of the Soviet Union and the delight that Moscow would no longer have to underwrite or finance the economies of its lackadaisical if not parasitic former colonies, some more calculating voices came to realize that a few of the republics were sitting on very valuable resources. Why it was asked should the exploitation of those of those resources benefit only the break away republics? Given that at least the preliminary geological exploration was made under Soviet auspices, not to mention expense, this seemed particularly unjust. As a minimum the Russians were entitled to a "finders fee". Finally Russians officials also came to relize, especially those who began to long for the reconstitution of the old USSR, that the more income the former Republics were able to generate, the more resistant they would be to rejoining the Soviet Union. It was probably no coincidence therefore, that the Russians began to restrict the access of several republics to outside export markets. Limiting Chevron's shipments of Kazakh oil through its pipeline to the west was one of the most blatant examples. Not surprisingly the view is very different in the former republics. To them the Russian efforts smack of neoimperialism. Without the revenue anticipated from Chevron's development of the Tengiz oil, Kazakhstan has had some severe financial problems. They are particularly concerned that because Chevron has been unable to sell what it already can produce, Chevron has been forced to cut back its investment in Kazakhstan. Similarly, Turkmenistan has been badly hurt because the Russians have been delinquent in paying for Turkmen gas used within Russia. This also explains why the Uzbeks are seeking markets to their south and east, that is non-Russian territory, and in this way seeking to escape Russian control. Finally the Russians have fought a prolonged battle to retain control of petroleum reserves in non-Russian territory such as Tataristan and Chechnya. Grudgingly they have come to allow it in Tataristan which makes the Chechans feel that they too should be allowed to keep the proceeds from the sale of petroleum produced within their territory.

The renewed Russian determination to assert control over the use of what they consider to be their resources has been complicated by the turmoil within the region, particularly i Chechnya. Relative to Russia's total production of oil, the amount of oil Chechans may be able to siphon off from deposits within Chechnya are not that large. At its post World War II pesk, Chechan oil amounted to no more than 10% of the national total. Today it is closer to 5%. But Chechnya's importance in Russian oil poitics and economics is no longer a matter of production alone. Much more important in today's world is the fact that that Grozny is at the hub of Russia's pipeline network from the Caucasus' and most important to the vast deposits in the Caspian sea off Azarbajian. According to some estimates the newest geological survey indicate that the azeri, Guneshli and Chirag offshore fields may turn fourth largest producing field in the world.^*9

[As of now, the trunk line from the Tengiz fields also traverses Chechnya. There are plans however to build a spur that would allow the Tengiz oil to skirt Chechnya on its way to Novorossiisk on the Black Sea. Even this diversion however would be vulnerable to sabotage since it will pase close to the Chechan border not far from Budennovsk, where a group of Chechans seized 150 Russian hostages in June 1995.]

If Russia's only concern was the Chechan rebellion, Russia would not be so anxious about the development of mineral reserves in the Caspian. However, in the aftermath of the breakup of the USSR, and the emergence of a newly assertive "independent" Azerbaijan, Russian oil policy has suddenly taken on a new importance. This is due to the fact that there is a real possibility that russia may find itself looking on from the outside as Azerbaijan, not Russia, becomes the recipient of billions of dollars worth of royalties from the sale of Caspian oil. Given the growing likelihood of such a development, the Caucasus, the Caspian Sea and the Chechan pipeline have suddenly become matters of international power politics, not only in the Kremlin, but because of the intense interest in the area by American oil companies, by the Washington White House.

Under the old regime, foreigners would probably not have been allowed an equity share or a participation role in the development in of the Caspian deposits. The Soviets never did that and as mentioned earlier even now there is great resistance to such an approach by the Russian owners of the newly privatized oil companies. This is true even when they lack the technology needed to develop deeper off shore deposits. Instead their practice is to do the work for them. The foreigners then have no equity share in the operation and this allows the Russians to retain their control.

Lacking the wherewithal to underwrite their own off shore development the azeris have adopted traditional world practices and opened up their fields to tender offers. Conscious of the sensitivities involved, they have sought a very broad mix of partners, the better to withstand Russian pressures. As the accompanying table indicates, the lead partners are the Azeris (SOCAR) with a 20% share and British Petroleum (Great Britain) and Amoco (American) each with a 17% interest. In addition four other American firms, one British, one Russian, one Norwegian, one Turkish and one Saudi Arabian company also have shares. The Iranians also sought a role and the Azeris agreed to transfer to them a 5% share from the Azeri holdings. However even though Iran shares the Caspian sea coast, the United States government insisted thar Iran be kept out and the Azeris ultimately backed down.

There was no such protest when the Azeris decided to offer an even larger share to the Russian company, LUKoil. Attempting to temper Russian hostility, the Azeris turned over a 10% interest in the project to LUKoil out of their own stake, thereby reducing their equity from 30 to 20%. As Russia's awareness of what was happening began to grow, however such gestures were considered to be inadequate. Adopting the new logic, Russian critics were quick to point out that LUKoil was a private business while the Caspian sea deposits were a matter of concern to the Russian government.

Not were Russians any happier when the state oil company of Azerbajian (SOCAR) entered into a subsequent agreement with LUKoil to exploit the Karabakh oil field located 120 km east of Baku in the Caspian sea.^*10 LUKoil's share was 32.5% and it was joined by the Italian firm Agip and the American Pennzoil which each took another 30%. This left SOCAR with 7.5%. with or without LUKoil, the Russians continue to insist that the Azeri authorities have no legal right to conclude such agreements.

It is easy to understand the Russian concerns. Oil from Caspian Sea deposits were first developed in the days of the czars and expanded in the Soviet era. Why should other governments now become the beneficiary of this initial work. To emphasize its point, the Russian government is now insisting that the Caspian Sea is really a lake and therefore Azerbijan can only claim underwater rights up to 10 km of shore rather than the much larger territory that it could claim if the Caspian were truly an international sea. Beyond that 10 km, Russia claims that it can drill for oil and that anyone else who does must receive Russian permission.^*11 Moreover The Russians insist that the governing code for the exploitation of the Caspian reserves, is the USSR-Iranian Traty of 1940 as well as earlier bilateral treaties of 1921 and 1935. The Russians claim to be the recipients of the former Soviet Union's prerogatives. This treaty then, can only be amended by a vote of both parliaments which in this case means Russia and Iran. The fact that Iran is not now a partner in the consortium means thet the original parties to the treaty have been excluded and therefore it is only natural that they are opposed to any such agreements. Such an interpretation invalidates unilateral acts by the Azeris which as the Russians see it, have all been illegal.^*12

This hardening of attitudes is part of the growing suspicion by the Russians of western intentions. As an example of his growing xenophobia Russian writers have gone so far as to assert that "almost all Russian oil deposits are "under the thumb" of leading foreign companies."^*13 Quoting Russian intelligence sources, these writers have accused Mobil oil of covertly gaining access to secret geological surveys of oil fields in Tyumin in West Siberia.

It is not just that oil companies from Russia's former enemies have been gathering data and control over what was once the Soviet Union's most valuable resources, but that their efforts seem to be part of a strategy to cut Russia off completly from the Trans Caucasus.^*14 How else can the United States support of Chechnya and "The Confederation of Mountain Peoples" be explained. This also fits innicely with newly intesified Russian attaks on NATO which is viewed as soliciting new members in eastern Europe and even the former republics of the Soviet Union all in an effort to push the border between east and west to Russia's front door. In a pincher movement, the United States seems to be moving up from the south.

As if all this were not threatening enough, the United States and its obedient oil companies have also begun to insist on the opening of a second pipeline route from the Caspian Sea. They argue such a second route is necessarry because pumping Caspian oil through Grozny would be too risky. Their solution is to construct a pipeline through Georgia and then on to Turkey. Even though this is a more expensive alternative than using the Grozny pipeline, a second pipeline would bring Turkey more prominently into the arrangement and allow the passage of oil by pipeline on to the Mediterranean Coast rather than neccesitate the shipment of more oil through the dardanelles Straits are already overcrowded.

In reply the Russians insist that they can pacify the Chechans and guarantee the security of the pipeline. As for the Dardanelles, the Russians have offered to build yet another pipeline from the Black Sea coast port of Burgas in Bulgaria to Alexandropulos in Greece also on the Mediterranean. As the Russians see it, Georgia with its various civil wars is not much more secure for a pipeline than Chechnya. The real reason the American oil companies want to ship through Georgia they insist is to deprive the Russians of the transit fees and insure that the Russians will lose monopoly control over the pumping and shipping of Caspian Oil.

The increasingly shrill tone of Russian declarations about the development of the Caspian oil shelf reflects the growing awareness by the Russians that the breakup of the Soviet Union has proven to be more costly than it was initialy realized. The losses include not only the almost $8 billion that will be invested in developing Caspian oil but the royalties and transit payments that the newly produced oil might bring particularly if the oil is routed north through Grozny must be pacified so that the Russian pipeline, which under normal circumstances would be the cheapest route from the Caspian to the West, will obviate the need for a Georgian alternative. Of course if the unrest in Georgia Flares again there will no longer be any advantage to using the southern route.

Many Russians have traditionally looked to theories of conspiracy to explain their history as well as current developments. It is not hard to see how they might fall back on such notions in explaining current developments on their doorstep in the Caucasus. First there is the breakup of the Soviet Union into fifteen independent countries and if that were not enough, the further effort to fragment even Russia. Than American petroleum firms rushed into claim shares of the mineral wealth of the Caspian, a body of water that has traditionally been treated as its own by the Soviet Union. To top it off senior officials from the American government have intervened to orchestrate the actions of the American petroleum firms and have forced them to exclude the Iranians from all such efforts. They than urged them to insist on the construction of a more expensive and in some sense redundant southern pipeline through Georgia that is designed to weaken Russia's bargaining role even more. As some of my more paranoid Russian associates have put it, "You could not defeat us in the Cold War so you sent in Gorbachev and Yeltsin with their ideas of Glasnost, Perestroika and shock Therapy to destroy us economically and break us up politically".

Short of precipitating the overthrow of the existing Azeri leadership (there has already been several attempts) the Russians will have a hard time reclaiming control of the Caspian reserves. Yet Russia could still salvage something from all this, if only it could guarantee a secure pipeline through Chechnya. As the Russians insist on maintaining an occupation army in the region this will not be an easy thing to do. This means that the Russians have an incentive to seek a peace accord. Alternatively defense minister Pavel Grachev's could prevail and the army could attempt to secure the pipeline by means of forceful repression. Grachev's way is hardly the solution for the long run.

*1 Yergi, Daniel the Prize. New York: Simon and Schuster, 1991. pgs: 334, 336, 337

*2 Tolf, Robert W. The Russian Rockefelleres, Stanford California, Hoover Institution Press, 1976, p. 41-42; Marshall I. Goldman, The Enigma of Soviet Petroleum: Half Empty or Half Full?, Boston, George Allen and Unwin, 1980, p. 13.

*3 Tolf, p. 42

*4 Goldman, Marshall I. p. 15

*5 Ebel, Robert E. "The History and Politics of Chechan Oil", Post-Soviet prospects, Washington D.C., The Center for Strategic and International Studies, Vol. 3, no. 1 January, 1995, p. 1

*6 yergin, pgs. 336,337

*7 Ebel, p.2

*8 Ebel, p.4

*9 Kirkorian, Van Z. Sisyphus' Oil: Pipeline Politics in the Caspian Basin, New York, Patterson, Belknap, Webb & Tyler, CIS Lawnotes, December, 1995, p.1; Financial Times, May 8, 1993, p.4: New York Times. September 9, 1995, p.3

*10 OMRI Radio Liberty, Radio Free Europe, November 16,1995

*11 Monitor, The Jamestown Foundation, November 22, 1995: Sovetskaia Rossiia, October 26, 1995 p.3; Van Z. Krikorian, Pp. 2,4,5

*12 Monitor, The Jamestown Foundation, November 22, 1995

*13 Nezavisimaia gazeta, October 20, 1995, p.6; Prism. The Jamestown Foundation, November 19, 1995, p.6

*14 Sovetskaia Rossiia, October 26, 1995, p.3