Potential Caspian oil production cannot free US from OPEC by 2008

Oil And Gas Journal
March 17 2004

Analyst: Potential Caspian oil production cannot free US from OPEC by

By OGJ editors

HOUSTON, Mar. 17 — Caspian Sea region oil reserves will not free the
US from its dependence on the Organization of Petroleum Exporting
Countries by 2008, said Wayne Andrews, analyst with Raymond James &
Associates Inc.

“Politically, the stakes may be high, but from a pure energy supply
standpoint, the region is only a minnow in the vast ocean of Middle
Eastern oil,” Andrews said in a research note last month.

The Baku-Tbilisi-Ceyhan pipeline will accommodate further development
by Azerbaijan International Operating Co. of the
Azeri-Chirag-Gunashli (ACG) complex off Baku. The pipeline will bring
oil from Caspian fields to Turkey where it will be exported to world

“While we see no inherent problem in the construction of the pipeline
itself, everyone should be clear that the amount of oil in question
is so modest as to be almost immaterial for the market,” Andrews

Best case scenario
Currently, the ACG Phase 1 produces less than 150,000 b/d. A BP
PLC-led consortium plans to ramp up production to 1 million b/d by
2008 in three phases, starting with 350,000 b/d in 2005 (OGJ Online,
Sept. 18, 2002).

But assuming that production does increase sevenfold in 4 years, the
growth only represents an extra 850,000 b/d.

“To put this in context, we project that global oil demand in 2004
will average 80.5 million b/d. Even assuming a very conservative 1.2%
annual demand growth for the next 4 years, 2008 demand would reach
84.4 million b/d, 3.9 million higher than currently,” Andrews said.

That means that Caspian oil would provide slightly more than 1% of
global demand in 2008, he concluded, noting that amount “will not
come even remotely close to replacing the West’s dependent on Persian
Gulf oil.” Meanwhile, OPEC is expected to supply 35-45% of world oil
supplies in 2008.

Obstacles to Caspian development
Andrews does not expect Caspian oil production to proceed as quickly
as project sponsors have forecast.

“If fact, there are several significant obstacles that may serve to
slow down development of the Caspian fields over the intermediate
term. While it is difficult to quantify their impact, it seems clear
to us that their overall influence will be negative,” he said.

The three biggest obstacles are corruption, political instability,
and the threat of violence.

The Baku-Tbilisi-Ceyhan pipeline is slated to run through Azerbaijan,
Georgia, and Turkey. Andrews noted that corruption “has reached
enormous proportions since 1991” in Azerbaijan and Georgia.

“Despite the institutional safeguards insisted upon by the
multilateral lenders who provided project finance for the pipeline,
it is probable that at least some of the funds will not be spent
according to Western ‘best practices.’ This has the potential to
materially slow the pace of construction,” Andrews said.

After pipeline construction is finished, the system will face the
threat of violence from a potential conflict between Armenia and
Azerbaijan (OGJ Online, Jan. 30, 2003).

“Where there is a durable ceasefire in place, it is important to
recall that this conflict had escalated into nearly full-scale war in
the early 1990s. Other ethnic tensions in the Caucasus may lead to
strikes on the pipeline and other oil infrastructure,” Andrews said.

In addition, the Caspian region presents the logistical problems of
operating in remote terrain and the technical challenges of handling
highly sour crude oil.

RJA outlined “a mid-range scenario” in which the Caspian supplies
0.5% of world oil demand by 2008.

“In short, the Caspian’s output potential is simply too low to be of
any real significance for the oil market, so there is every reason to
believe that OPEC will be at least as firmly in control of the market
in 2008 as it is today,” Andrews said.