Energy and Conflict

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Energy and Conflict

• in Central Asia and the Caucasus

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Background

• Caspian Sea Region
• Russia, Azerbaijan, Iran, Turkmenistan,
  Kazakhstan
• Conflicts and political, economic interests
  include many more states.
• Georgia, Armenia
• Undeveloped by Soviet Union, which left only
  economic and environmental disasters behind

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1991 End of the Glorious Empire

• Chevron signs deal with Kazakhstan to develop
  Tengiz fields.
• Azerbaijan scrambles for similar investment,
  signing an agreement with a consortium of oil
  companies to develop Chirag, Azeri, Guneshli
• Azerbaijan signs 19 more agreements soon after

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Dividing the Caspian
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Downsizing the Caspian

• Although the Caspian Sea region has an abundant
  oil supply, its importance in world politics and
  to U.S. strategic interests is often over-hyped
  by the media.
• Contribution to world oil production and reserves
  only 3 by 2010
• Baku-Ceyhan pipe, un-profitability, Russian
  insecurity and the truth of the myth of U.S.
  interest

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Caspian Region in the 21st Century

• Crossroads of time
• Political economic system of the 17th century
• Why the Caspian states dont quite fit the role
• Another Great Game?
• Probably not. Why do they overplay this?
• Communist legacy
• Environmental catastrophe, penciled divisions

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OPEC Lessons

• Special considerations of landlocked states (p33)
• Most OPEC members wasted their petro billions
• Dutch disease - Increasing service industry
  without industrialization and agricultural base
  leaves them with a single export
  over-development in one sector
• Price subsidies, military buildup, corruption

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Remedies

• Sterilize petroleum revenues by putting them in
  an oil trust fund abroad
• Market mechanisms to check state role, guarantee
  economic stability
• Develop industry and agriculture
• Improve financial, judicial systems to provide
  transparency, fight corruption
• Resist projects of immediate gratification

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Early successes and failures

• Privatization, economic stability
• Sterilization of early-oil bonus payments in Az
• Financial reform in Kazakhstan, Azs promise
• Azerbaijan and Kazakhstan implement tax codes
• But signs of Dutch Disease already present (p43)
• Tax code problems no collection mechanism (Kz)
  and a bias towards oil sector (Az)
• Political bureaucracies resemble Soviet-era,
  corruption

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Azerbaijan
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Alphabet Soup

• SOCAR State Oil Company of the Ajerbaijani
  Republic
• PSA production-sharing agreements
• AIOC Azerbaijani International Operating Comany

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Politicization of Oil

• Neft Dashlari
• The grim picture
• Oil Its all weve got!
• Lack of political allies, industry and export
  manufacturing
• PSAs

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Politicization of oil

• Nagorno-Karabakh (pic)
• Expensive to both lives and money
• Humiliation and loss of 1/6 of land
• Costs of central control, also of Lezgins
• 1 million internally-displaced persons (of total
  7m)
• Aliyev dictates oil policy, son VP of SOCAR
• Elected by a coup, former friend of the USSR,
  carries on legacy of corruption

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Politicization of oil

• Nagorno-Karabakh (pic)
• Expensive to both lives and money
• Humiliation and loss of 1/6 of land
• Costs of central control, also of Lezgins
• 1 million internally-displaced persons (of total
  7m)
• Aliyev dictates oil policy, son VP of SOCAR
• Elected by a coup, former friend of the USSR,
  carries on legacy of corruption

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Heydar Aliyev
President of Azerbaijan since 1993 coup
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Oil-Politics Dynamic I

• SOCAR maintains complete control of oil,
  Parliament has no oversight or real power
• Weak laws expose foreign companies to irregular
  legal, regulatory and tax scrutiny
• Not to mention bribes, rent-seeking etc.
• Contracts that increasingly favor SOCAR
• Demands more from PSAs than it puts into
  production

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Oil-Politics Dynamic II

• Oil helps in centralizing political power
• Baku at the heart of the oil, oil at the heart of
  Baku
• Leaves outlying regions without any bargaining
  chip
• Promotes ethnic secessionist movements in Lezgin,
  Talish
• Media de-emphasizes oil so people wont expect to
  see a large increase in their standards of living

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Pipe Dreams