BACKGROUND: The Iraq war has raised concerns regarding the political environment and profitability of Caspian oil, with some arguing that it fundamentally changes the situation there. Fear are that large multinational companies will shift resources for Iraqi exploration, thus slowing down Caspian development and transit projects, and delaying the flow of the Caspian oil to the international markets. Question that arise are what role the U.S. is planning to play in the region in view of continuing instability in Iraq, while the Iranian regime is pursuing development of weapons of mass destruction and may be coming under increasing U.S. pressure to stop its nuclear program? These concerns, among other, reverberated through a number of conferences which took place in Turkey recently. On the one hand, Iran’s stance is, at least outwardly, moderating. Mehdi Safari, Iranian Deputy Minister of Foreign Affairs, expressed a relatively moderate position on the Caspian boundary delineation issue, putting his country’s claims in the context of international law. While Iranians have in the past demanded an equal share of all Caspian oil, today their claims are being scaled down. Iranian representatives also made a pitch to become a transit country for abundant Kazakhstani oil through a proposed North-South oil pipeline – a suggestion supported by a number of participants, from the French TotalFinaElf, to a small Georgian company which currently specializes in rail transport of Kazakh oil to Iran. However, in less official settings Iranian contradict their message with accusations and claims against the U.S. The Iranian rhetoric, articulated among other by senior officials of the Energy Ministry, stick out as a sore thumb in a generally cooperative atmosphere, justifying suicide bombers and claiming that U.S. policy is ruled by a two percent minority of the population, which includes the international Zionist conspiracy and arms manufacturers. Iranian officials’ statements that Bin Laden is a tool of American intelligence agencies have not helped, either. French and Russian sympathy for the Iranian views are also a problematic element. Meanwhile, Kazakhstan is stepping up efforts to work with TotalFinaElf, Phillips and ENI to develop a pipeline which will allow the export of oil from the giant Kashagan field to the CPC pipeline, as noted by Uzakbay Karabalin, president of the government-owned KazMunaiGaz. A trunk to Baku-Tbilisi-Ceyhan (BTC) is also under consideration. Kazakhs representatives have, however, warned that a decline in Western investments could force Kazakhstan to “turn to the East”, giving a priority to a pipeline to China. It may also increase oil swaps with Iran, already underway. While BP is moving aggressively to finalize the construction plans for BTC pipeline, the Balkan countries and Ukraine are only beginning to lay down the framework for transit pipelines which will bypass the congested Bosphorus straits. Presentations of the Burgas-Vlore (Albania) pipeline by Albanian-Macedonian-Bulgarian (AMBO) corporation, which claimed to offer at some future point a considerably cheaper transit price due to the ability of the deep water port in Vlore to accommodate large tankers, have caused some interest. So has a Romanian scheme called Constanta-Pancevo-Omisalj-Trieste to build a pipeline via Romania, Yugoslavia and Croatia, presented by Andrei Razvan Grigorescu, Romanian Secretary of State. Dr. Mejid Kerimov, Minister of energy of Azerbaijan, in the concluding keynote speech focused on expanding natural gas exports to already gas-inundated Turkey, which currently receives gas from Russia and Iran. The Shah-Deniz giant field, one of the largest in Eurasia, is planned to supply 6.6 billion cubic meters. A Shah Deniz-Erzurum pipeline with its 14 wells will be constructed with financing of $3.2 billion, good part of it coming from the European Bank for Reconstruction and Development.

IMPLICATIONS: Policy makers and oil companies in the region are concerned that the opening of Iraq to new oil and gas development will make the investment climate and geopolitical reality for pipeline transit more competitive, possibly taking a bite at profitability and available financing. U.S. policy is grounded on the goal of helping the Caspian countries use their oil resources to develop their economies and societies; that is a long-term strategy that will not change because of Iraq. A senior U.S. diplomat, however, has recently called on Caspian countries to liberalize their economies and fight corruption, warning that unless that takes place, the flow of Western investment may diminish. Private investors and financing institutions face political risks, such as a potential flare-up of Nagorno-Karabakh or other local conflicts, but they clearly have sufficient comfort that projects such as the Baku-Ceyhan pipeline will not be disturbed. On the other hand, there is no question that Iraq will compete with the Caspian for western financial resources. The U.S. policy is likely to increasingly focus on encouraging Caspian governments to develop a more favorable investment climate. But oil companies view projects such as AIOC and BTC as designed with a long time horizon, which includes price scenarios far below the current levels. Financing for the BTC pipeline has been delayed by about three months. According to some observers, this is time well spent as it has been used by the developers to ensure that the project meets the most stringent environmental and social standards. International Financial Institutions now seem more than comfortable with these aspects of the project.

CONCLUSIONS: The Iraq war and its aftermath is changing the geopolitical and geo-economic outlook in Iran, Turkey, Russia and the Caspian states. Interviews with officials and experts from the region indicated that policy adjustments are taking place across the region to integrate into the new reality. The new post-war environment is characterized by the need for greater competitiveness for oil and gas projects in terms of both profitability and available financing. Another elements is the need to make both green field extraction projects and pipelines more attractive for foreign investors through deregulation and lower tariff and taxation regimes. Most importantly, however, there has been a change in the regional thinking on U.S. policy. In fact, an understanding that American power is here to stay in the region for the foreseeable future has developed into a consensus in recent months.

AUTHOR’S BIO: Ariel Cohen, Ph.D., is Research Fellow in Russian and Eurasian Studies at The Heritage Foundation. His expertise includes international energy security.