Order Code RS21190
Updated January 17, 2006
CRS Report for Congress
Received through the CRS Web
Caspian Oil and Gas:
Production and Prospects
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
Summary
There is a likelihood of large reserves of crude oil and natural gas in the Caspian
Sea region, and a consequent large increase in oil and natural gas production from that
area. Because diversity of energy sources is a consideration in Congressional
deliberations on energy policy, this prospect could play a role in such discussions.
However, there are notable obstacles to increases in Caspian Sea region production of
oil and gas that may slow development. This report will be updated as events warrant.
The Caspian Sea is a 700-mile-long body of water in central Asia bordered by
Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan. Among the five nations, only
Iran is a member of the Organization of Petroleum Exporting Countries. Azerbaijan,
Kazakhstan, and Turkmenistan became independent when the Soviet Union dissolved in
1991. The Caspian Sea region historically has produced oil and natural gas, but the region
is considered to have large resources of oil and gas capable of much greater production.
Current Production and Proven Reserves
The Caspian Sea region presently is a significant, but not major, supplier of crude
oil to world markets, based upon estimates by BP and the Energy Information
Administration (EIA), U.S. Department of Energy. The Caspian region produced roughly
1.8 million barrels per day (bbls/day) including natural gas liquids in 2004, or 2% of total
world output (Table 1).1 Fifteen non-Caspian region countries each produced more than
1.8 million bbls/day in 2004. Caspian region production has been higher, but suffered
during the dissolution of the Soviet Union and the years following. Kazakhstan, whose
production has risen rapidly since the late 1990s, accounted for 68% and Azerbaijan for
18% of regional crude oil output in 2004.
Based upon figures published by BP, Caspian region oil production comes from
proven (economically recoverable) reserves of 47 billion bbls (Table 2). This equals
1 EIA. Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, August 2005
[http://www.eia.doe.gov/emeu/cabs/Caspian/images/caspian_balances_pdf]. This report does not
include Uzbekistan, which does not border the Caspian Sea, in the Caspian Sea region.
Congressional Research Service ˜ The Library of Congress

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about 4% of total world proven reserves, and much more than BP’s figure for U.S.
reserves (29 billion bbls).2 EIA estimates of much larger “possible” reserves suggest a
potential for much greater production. However, as indicated by analysis later in this
report, there are obstacles to output increases both now and in the future.
The Caspian Sea region’s relative contribution to world supplies of natural gas is
larger than that for oil. With gas production of about 2.8 trillion cubic feet per year
(tcf/yr) in 2004, it accounted for 3% of world output. As with oil, gas production has
been higher, but suffered during the collapse of the Soviet Union and the following years.
Turkmenistan is the heavily predominant producer; with production of 2.1 tcf/yr, it
accounts for almost three-fourths of the region’s gas output.
Table 1. Oil and Gas Production in the Caspian Sea Region
Crude Oila
Natural Gas
(thousands of barrels per day)
(trillion cubic feet per year)
2010
Country
1992
2004
1992
2004
2010
Low
High
Azerbaijan
222
319
789
1,290
0.28
0.19
0.60
Kazakhstan
529
1,221
748
2,400
0.29
0.56
1.24
Russiab
n.a.
n.a.
200
n.a.
n.a..
n.a.
Turkmenistan
110
260
475
1,000
2.02
2.07
4.24
Total Caspian
861
1,800
2,212
4,890
2.59
2.82
6.08
WORLD
73,935
80,260
95,100
72.195
95.013
110.00c
n.a. - Not available from specified sources.
a Includes natural gas liquids.
b Regions near the Caspian Sea.
c Consumption.
Sources: BP. BP Statistical Review of World Energy 2005, June 2005; Energy Information Administration.
Caspian Sea Region Country Analysis Brief, September 2005; EIA. Caspian Sea Region: Survey of Key
Oil and Gas Statistics and Forecasts
, August 2005; EIA. International Energy Outlook 2005, July 2005,
at [http://www.eia.doe.gov/oiaf/ieo], viewed December 31, 2005.
Unlike oil, the region’s proven reserves of natural gas are a higher proportion of the
world total than is its natural gas production. In some important instances, exploration
efforts hoping to find oil have found almost entirely gas instead. The estimate of proven
reserves of natural gas in the Caspian Sea region for 2004 published by BP — 257 tcf —
represents 4% of the world total. Increases in Caspian Region gas production face
obstacles somewhat similar to those that challenge further oil development and
production.
2 Three-fourths of BP’s figure for Caspian region total gas reserves is accounted for by a reported
30-billion barrel increase in Kazakhstan’s reserves between 2003 and 2004.

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Table 2. Estimates of Oil and Gas Reserves and Resources
Proven Reserves, BP, End of 2004
Possible Additional
Oil/Gas
Region
Country
Oil (billions of bbls)
Natural Gas (trillion tcf)
EIAa
Azerbaijan
7.0
48
32/35
Iranb
0.1c
n.a.
15/11
Caspian
Sea
Kazakhstan
39.6
106
92/88
Region
Russiab
0.3
n.a.
7/n.a.
Turkmenistan
0.5
102
38/159
TOTAL
47.5
257
184/293
United States
29
187
47/271d
North Seae
15
168
n.a..
Reference
Areas
Saudi Arabia
263
238
n.a.
WORLD
1,148
6,337
n.a.
n.a. - Not available from sources listed below.
a Excludes proven reserves. Data from various sources compiled by EIA in Survey cited below.
b Only resources near the Caspian Sea are included.
c Data from EIA.
d Undiscovered conventional oil and gas.
e Includes Denmark, Germany, Netherlands, Norway, and United Kingdom.
Sources: BP. BP Statistical Review of World Energy 2005. June 2005; Penwell Publishing Company. Oil
& Gas Journal.
December 20, 2004; Department of Energy, EIA. Caspian Sea Region: Survey of Key Oil
and Gas Statistics and Forecasts,
August 2005; U.S. Geological Survey. “National Oil & Gas Assessment,”
at [http://www.energy.cr.usgs.gov/oilgas/noga/2004update.htm], viewed March 1, 2005.
Resource and Production Prospects
There is a likelihood of much greater additional reserves of crude oil and natural gas
being found in the Caspian Sea region. This is supported by the fact that a number of oil
companies have large stakes there. Much of the known reserves have not been developed
yet, and development usually leads to discovery that prospects are larger than originally
estimated. Moreover, many areas remain unexplored. The EIA estimates that an
additional 184 billion barrels of crude oil reserves are possible,3 which would raise the
total to well over10 times its present level. This level of proven reserves would equal
almost 90% of the amount now held by Saudi Arabia and could come to about 20% of
total world reserves. If the high output projection for 2010 in Table 1 comes to pass,
Caspian region oil production will have risen nearly 175% — to 4.9 million bbls/day.
The prospective increase in natural gas proven reserves appears to be much smaller
in relative terms than for oil, but still very large. It is estimated that there are nearly 300
tcf in additional natural gas reserves in the region. Should this be the case, total Caspian
region proven reserves in 2010 would put the region’s proven gas reserve total at about
2.75 times its present level and far exceed present Saudi Arabian natural gas reserves.
Given such expectations, it is estimated that Caspian Region natural gas production
would exceed six tcf by 2010.
3 Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, August 2005.

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Any comparison of the volumes of Caspian Sea region oil and natural gas reserves
versus those of Saudi Arabia, however, must be tempered by acknowledgment of the
considerable advantage of Saudi oil and gas in terms of much lower costs of production
and much easier market access. Also, whatever the quantities and the production costs
of their energy resources, Caspian countries’ ability to develop and bring them to market
could depend to some extent on the ability to establish and maintain relationships with
international energy companies
Present and Prospective Markets
In view of the above, Caspian region countries potentially are large exporters of oil
and gas. Caspian Sea region oil and gas has several markets now and a wider variety of
potential markets. These include nations trying to meet their economies’ demand for
energy and those that also wish to reduce their dependence on Persian Gulf energy.
Now, nearly all Caspian crude oil goes north and/or west. Reflecting the Soviet era
dictates and infrastructure, it travels largely via pipeline to and/or through Russia to
European markets, with refineries as part of the network. Some also goes by tanker
through the Bosporus straits to Western European markets via the Mediterranean. Natural
gas transportation, even more than oil, is tied to pipelines going mainly north and/or west
through Russia and its monopoly pipeline system — Transneft. This, together with the
fact that Russia itself produces oil and gas, provides Russia with the market power to
collect transit fees on Caspian energy shipped through its transportation network, and to
determine in some cases how much, if any, it is willing to transport. Also, because energy
competes on a delivered-cost basis, reflecting transit fees, Caspian energy wellhead prices
suffer. Caspian region countries thus have incentives to develop alternatives to routes
through Russia — possibly consortia of routes that would avoid long transits through
Russia in reaching European and other markets and provide leverage in negotiating transit
fees on shipments that do go through the Russian pipeline system.
In addition, after Russia’s early January 2006 temporary cutting of natural gas
supplies through Ukraine, it is likely that Western European countries, which already had
been seeking to diversify their sources of gas, will more actively seek non-Russian gas so
as to reduce the effect of feared future cut-offs.
Caspian energy sources are attractive to Turkey: they are close and offer Turkey an
opportunity to offset part of its energy import bill through transit fees for shipments across
its territory. Turkey’s energy use is growing much faster than its output, making it a
rapidly growing importer of both oil and gas; it already is a large market for Russian gas.
Also, Turkey has very good relations with Caspian and Central Asian countries.
East Asian countries also are potentially attractive markets. Japan already imports
a significant quantity of gas; and energy consumption in India and Pakistan is growing
rapidly. Perhaps most significant, China’s proven oil and gas reserves are small compared
with the current and potential size of its economy and recent steep increases in its oil
consumption. This has led to the building of an oil pipeline from Kazakhstan to China.
The prospects of Caspian energy exports to the regions identified above may be
limited by newly expanding or developing non-Caspian energy exports to those regions.
These developments include expansion of North Africa’s gas export capacity, discovery

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of a large natural gas province in and near Egypt, development of a large gas field in
Pakistan, and growing liquefied natural gas export capacity of Persian Gulf nations.
Challenges to Further Development
There are, however, inter-related geographical, political, economic, technological,
legal, and psychological obstacles to the further exploration for and development of
Caspian Sea region energy resources.
Because the Caspian Sea is landlocked and the region’s nations are distant from the
largest energy markets, transportation must at least begin by pipeline, followed in many
cases by tanker through the shallow and congested Bosporus straits. Pipelines from the
Caspian region completed before 1997, except those in northern Iran, were routed to
Russia and designed to link the former Soviet Union internally. The several pipelines
now operating have sufficient capacity to handle present production, but little more.
Completion of the CPC pipeline from Kazakhstan’s Tengiz oilfield to Novorossiisk
(Russia) on the Black Sea in 2001 and its planned expansion is notable, but the effective
capacity of the CPC line, and that of others, may be constrained by limits on tanker
passage through the Bosporus.4 The BTC pipeline, in early January 2006, is expected to
start delivering oil in the first half of the year; when it does, its capacity plus that of the
operating pipelines in Table 3 will total 2.2 million bbls/day. New pipelines to serve east
Asian markets have economic potential but could be lengthy, and entail transit through
Afghanistan, Iran, and/or Pakistan. Routes to east Asian markets via Iran would include
shipping through the Persian Gulf.
These issues are complicated by the fact that pipeline routes face potential
disruption by regional conflicts. These include longstanding tension between India and
Pakistan, continuing unsettled conditions in Afghanistan, the Armenia-Azerbaijan dispute
over Nagorno-Karabakh, separatist efforts in Georgia, and military activity in Chechnya.
It is deducible from the above that deciding upon pipeline routes that have a
reasonable assurance of security and are politically acceptable to parties with influence
in the region are hurdles in the development of Caspian Sea region energy resources.
On the purely economic side, the longer the pipeline route, the less attractive it is to
producers, other things being equal, inasmuch as energy competes on a delivered-cost
basis and transit fees (based upon distance) effectively lower the wellhead price received
by producers. Because transit fees are a source of revenue to governments, politics as
well as economics come into play in pipeline route selection. Built-in precautions to
minimize environmental impacts, particularly in and around the Sea, add to pipeline costs.
In addition, much of Caspian energy resources are offshore, requiring special large
drilling rigs. Very limited rig production capacity in the relatively isolated region makes
4 Limited depth, heavy traffic, and environmental considerations have resulted in restrictions by
Turkish authorities on travel through the Bosporus. Supporters of the Baku to Ceyhan pipeline
assert that Ceyhan, a Turkish Mediterranean Sea port, can handle very large carriers, while the
Supsa and Novorossisk ports are restricted to smaller tankers that can transit the Bosporus. Also,
Ceyhan can remain open all year, whereas Novorossiisk is closed up to two months per year.

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the acquisition of rigs expensive and logistically difficult, hampering development of
Caspian energy resources. This situation is easing a little as one new rig was added to the
fleet in the past year and another is in the production pipeline.
Full realization of the energy potential of the region also is impeded by the
unresolved legal status of the Caspian Sea. Despite a number of efforts, so far only
Azerbaijan, Kazakhstan, and Russia among the littoral states have reached agreement on
delineating ownership of the Sea’s resources or their rights of development. Potential
wealth from development heightens the stakes for each country, leading to conflicts over
claims to promising regions.
Investment enthusiasm slackened after the surge of production-sharing agreements
during the early and mid 1990s. Some recent exploration efforts have had disappointing
results, particularly with respect to oil. Somewhat reduced activity, from less investment,
has reduced the rate of discovery, with a further psychological effect.

Despite the obstacles discussed above, energy development in the Caspian Sea
region is proceeding and is likely to proceed further given the widely perceived prospect
of very large energy resources in the Caspian Sea region. The pace of development,
however, may be less rapid than might otherwise be the case.
Table 3. Selected Oil Pipeline Routes from the Caspian Sea Region
Length
Capacity (bbls/day)
Pipeline
Route
(Miles)
2005/’06 2010/’15
Operating
Atyrau-Samara
Atyrau, Kazakhstan,
432
310,000
500,000
to Samara, Russia
Baku-
Baku, Azerbaijan, via Chechnya,
868
100,000
300,000
Novorossiisk
to Novorossiisk, Russia/Black Sea
(possible)
(northern route)
Baku-Novorossiysk
Baku to Novorossiysk
204
120,000
360,000
via Dagestan, Russia
(planned)
Baku-Supsa
Baku to Supsa, Georgia/Black Sea
515
100,000
100,000
Caspian Pipeline
Tengiz oil field, Kazakhstan,
980
560,000
1,340,000
Consortium (CPC)
to Novorossiysk
(planned)
Near Completion or Under Construction
Baku-Ceyhan (BTC)
Baku to Tbilisi, Georgia, to
1,040
1,000,000
1,000,000
(being filled)
Ceyhan, Turkey/Mediterranean Sea
Iran Oil Swap
Neka (Iranian port) to Persian Gulf; oil
208
170,000
370,000
(under construction)
will be swapped for equivalent amount
Kazakhstan-China
Atasu (Kazakhstan) to
613
200,000
400,000
(being filled)
Xinjiang (China)
(1st stage)
Sources: BG Group plc. BG Country Operations - Kazakhstan, [http://www.bg-group.com/international/int-
kaz.htm], viewed on March 4, 2005; Energy Information Administration (EIA), Caspian Sea Region
Country Analysis Brief,
December 2004; EIA. Caspian Sea Region: Reserves and Pipelines, Table 4, July
2002; EIA. Kazakhstan Country Analysis Brief, November 2004. For EIA Country Analysis Briefs and
related data, see [http://www.eia.doe.gov/emeu/cabs].