Order Code RS21190
Updated January 8, 2007
Caspian Oil and Gas:
Production and Prospects
Bernard A. Gelb
Specialist in Industry Economics
Resources, Science, and Industry Division
There is a likelihood of relatively 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 and energy security are
considerations in Congressional deliberations on energy policy, this prospect could play
a role in such discussions. However, there are obstacles to increases in Caspian Sea
region production of oil and gas that slow some 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 1.9
million barrels per day (bbls/day) including natural gas liquids in 2005, or 2% of total
world output (Table 1).1 Thirteen non-Caspian region countries each produced more than
1.9 million bbls/day in 2005. Caspian Sea region oil output 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 67% and Azerbaijan for
22% of regional crude oil output in 2005.
EIA. Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006. The
present report does not include Uzbekistan, which does not border the Caspian Sea, in the
Caspian Sea region.
Based upon figures published by BP, Caspian Sea region oil production comes from
proven (economically recoverable) reserves of 48 billion bbls (Table 2). This equals
about 4% of total world proven reserves, and much more than BP’s figure for U.S.
reserves (29 billion bbls). 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 natural gas supplies is larger
than that for oil. Its gas production of 3.0 trillion cubic feet per year (tcf/yr) in 2005 was
3% of world output. As with oil, gas production has been higher, but suffered during the
Soviet Union’s collapse and the following years. Turkmenistan is the largest producer;
with production of 2.0 tcf/yr, it accounts for almost two-thirds of the region’s gas output.
Table 1. Oil and Gas Production in the Caspian Sea Region
(thousands of barrels per day)
(trillion cubic feet per year)
n.a. - Not available from specified sources.
a. Includes natural gas liquids.
b. Regions near the Caspian Sea.
Sources: BP Amoco. BP Statistical Review of World Energy 2001, June 2001; BP BP Statistical Review
of World Energy June 2006; Energy Information Administration. Energy Information Administration.
Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006; EIA. International
Energy Outlook 2006, June 2006, [http://www.eia.doe.gov/oiaf/ieo/index.html], viewed September 7, 2006.
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 instances, exploration efforts
hoping to find oil have found gas instead. The estimate of proven reserves of natural gas
in the Caspian Sea region for the end of 2005 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.
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
Table 2. Estimates of Oil and Gas Reserves and Resources
Proven Reserves, BP, End of 2005
Natural Gas (trillion tcf)
Oil (billions of bbls)
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 June 2006; Penwell Publishing Company. Oil & Gas
Journal, December 18, 2006; Energy Information Administration. Caspian Sea Region: Survey of Key Oil
and Gas Statistics and Forecasts, July 2006; U.S. Geological Survey. “National Oil & Gas Assessment,”
at [http://energy.cr.usgs.gov/oilgas/noga/], viewed March 1, 2005.
estimated. Moreover, many areas remain unexplored. It is estimated that an additional
184 billion barrels of crude oil reserves are possible,2 which would raise the total to
almost five times its present level. This level of proven reserves would nearly equal the
amount now held by Saudi Arabia and could come to about 15% of total world reserves.
If the high output projection for 2010 in Table 1 comes to pass, Caspian Sea region oil
production would have more than doubled — to 4.1 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 between 250
and 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 more than twice its present level and far exceed present Saudi Arabian natural gas
reserves. Given such expectations, it is estimated that annual Caspian region natural gas
production would reach 5.4 tcf by 2010. 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
Caspian Sea Region: Survey of Key Oil and Gas Statistics and Forecasts, July 2006.
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 Sea region countries potentially are large exporters of
oil and gas. Caspian Sea 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.
Reflecting Soviet era dictates and infrastructure, much of Caspian region crude oil
goes north and/or west — largely via pipeline to and/or through Russia to European
markets. Some also goes by tanker through the Bosporus straits to Western European
markets via the Mediterranean. However, as indicated below, the trend is away from
Russian and Bosporus routes. 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, combined with the fact that Russia itself produces oil and gas,
gives Russia the market power to levy 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,
wellhead prices in the region suffer.
Caspian Sea countries thus have incentives to develop alternatives to routes through
Russia – possibly a 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, given Russia’s
early January 2006 cutting of natural gas supplies through Ukraine, it is likely that
Western European countries — already seeking to diversify their sources of gas — will
more actively seek non-Russian gas to reduce the effect of feared future cut-offs.
Caspian region 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
economic output, making it a rapidly growing importer of both oil and gas; it already is
a large importer of Russian gas. Also, Turkey has good relations with Caspian countries.
East Asian countries also are potentially attractive markets. Japan already imports
a significant quantity of natural 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 the recent steep
increases in its oil consumption. This has led, for example, to the building of an oil
pipeline from Kazakhstan to China, which was completed and began to be filled in
November 2005,3 and consideration of a Kazakhstan-to-China natural gas pipeline.4 The
prospects of Caspian energy exports to the regions identified above, however, may be
Martin Clark, “Beijing Triumphs with Inauguration of Kazakhstani Pipe,” FSU Oil & Gas
Monitor, December 21, 2005, p. 2.
“Kazakhstan, China Consider Gas Pipeline Construction,” FSU Oil & Gas Monitor, December
7, 2005, p. 4.
limited by newly expanding or developing non-Central Asian energy exports to those
regions. These developments include expansion of North Africa’s gas export capacity and
discovery of a large natural gas province in and near Egypt.
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, some with implications for U.S. energy security.
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
region completed before 1997, except those in northern Iran, were routed to Russia and
designed to link the together the states of the former Soviet Union. The several pipelines
now transporting Caspian region oil westward, and thus to European and, potentially, to
U.S. markets, have sufficient capacity to handle present production (Table 3).
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, previously noted. The capacity of the BTC pipeline, which
has begun delivering oil, plus that of other pipelines transporting oil from the Caspian Sea
and surrounding area totals 2.2 million bbls/day.
However, Iran now can compete somewhat with the BTC pipeline through oil
“swaps” that ultimately divert Caspian region oil away from Western, including U.S.,
markets. Iran has enlarged its tanker terminal at Neka on the Caspian Sea coast,
enhancing its capacity to deliver Caspian oil to refineries for local consumption, with an
equivalent amount of Iranian oil exported through Persian Gulf terminals.
New pipelines to serve east Asian markets have economic potential but could be
lengthy, and possibly entail transit through Afghanistan, Iran, and/or Pakistan. A pipeline
that avoids these nations is the recently completed Kazakh 620 mile oil export pipeline
from Atasu in central Kazakhstan to Alashankou, adjacent to the Xinjiang region of
China. With an initial capacity of 400,000 bbls/day, it began delivering oil in May 2006.
Routes to east Asian markets via Iran would include shipping through the Persian Gulf.
Complicating the pipeline issues is the fact that potential pipelines could be disrupted
by regional conflicts. These include the Armenia-Azerbaijan dispute over NagornoKarabakh, longstanding tension between India and Pakistan, continued unsettled
conditions in Afghanistan, intermittent military activity in Chechnya, and Chechen rebels’
use of Georgia’s Pankisi Gorge region as a base and refuge.
Deciding upon pipeline routes that have a reasonable assurance of security and are
politically acceptable to parties with influence in the region are major hurdles in the
development of Caspian 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 Caspian Sea, also add to pipeline costs.
In addition, much of Caspian Sea energy resources are offshore, requiring special
large drilling rigs. Very limited rig production capacity in the relatively isolated region
makes the acquisition of rigs expensive and logistically difficult, hampering development
of Caspian energy resources. This situation is easing a little as a new rig was added to the
fleet recently and another is in the production pipeline.
Full realization of the energy potential of the Caspian 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 the rights of development. And this does
not prevent disputes between these countries and Iran and Turkmenistan. In addition,
Turkmenistan has made much less progress in developing its hydrocarbon resources than
Azerbaijan and Kazakhstan.
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 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
to Samara, Russia
BakuBaku, Azerbaijan, via Chechnya,
to Novorossiysk, Russia/Black Sea
Baku to Novorossiysk
via Dagestan, Russia
Baku to Supsa, Georgia/Black Sea
Baku to Tbilisi, Georgia, to
Ceyhan, Turkey/Mediterranean Sea
Tengiz oil field, Kazakhstan,
Iran Oil Swaps
Neka (Caspian port) to Persian Gulf;
oil is swapped for equivalent amount
Atasu (Kazakhstan) to
Sources: Numerous media sources through mid-2006 supplementing Energy Information Administration
(EIA) Caspian Sea Region Country Analysis Brief, September 2005, EIA. Caspian Sea Region: Reserves
and Pipelines, Table 4, July 2002; EIA. Kazakhstan Country Analysis Brief, July 2005. For EIA Country
Analysis Briefs and related data, see [http://www.eia.doe.gov/emeu/cabs].
n.a. - Not applicable