Caspian Sea Breakthrough Treaty Set to Boost Oil, Pipeline Plans

(Bloomberg) -- Five Caspian Sea states reached a breakthrough agreement on sovereign rights to the sea, paving the way for new oil and gas extraction -- and pipelines -- after more than two decades of disputes.

The treaty ends a spat over whether the Caspian is a sea or a lake, granting it special legal status and clarifying the maritime boundaries of each surrounding country. It also allows each to lay pipelines offshore with consent only from the neighboring states affected, rather than from all Caspian Sea nations.

Caspian Sea Breakthrough Treaty Set to Boost Oil, Pipeline Plans

“Many years of thorough work have culminated today in the signing of the Convention on the Legal Status of the Caspian Sea,” Kazakhstan President Nursultan Nazarbayev said Sunday in the coastal city of Aktau, as broadcast by Rossiya 24 television. The five states also signed agreements on trade and economic ties, transportation and fighting terrorism.

Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have tried to define the Caspian Sea’s legal status since the collapse of the Soviet Union, in order to divide up the waters and its natural resources for new drilling and pipelines. The territorial disputes have prevented the exploration of at least 20 billion barrels of oil and more than 240 trillion cubic feet of gas, the U.S. Energy Information Administration estimated in 2013.

Outstanding Issues

While the treaty “will take us one step forward,” there remain “important issues” to be resolved, Iranian President Hassan Rouhani said Sunday before the summit, as reported by the IRNA news agency. One issue is the distribution of rights to seabed oil and gas deposits, according to Eurasia Group analyst Zachary Witlin.

“Further talks will be needed to provide full legal clarity on the boundaries of the division and future rights to either contested or undiscovered fields,” Witlin said in a research note before the summit.

The new agreement states that the development of seabed reserves will be regulated by separate deals between Caspian nations, in line with international law. This essentially cements the current situation, since countries such as Kazakhstan and Russia already have bilateral accords on joint projects.

Coastal Reserves

The five Caspian Sea nations already develop offshore oil and gas reserves that are located near enough to the coast not to be disputed. Projects in the northernmost waters -- Kazakhstan’s giant Kashagan field and Russia’s Filanovsky and Korchagin deposits -- are seen as sources of future oil-output growth for the countries.

The treaty will also remove a legal barrier to building a trans-Caspian gas pipeline from Turkmenistan to Europe, the Oxford Institute for Energy Studies said in July, adding that “political and strategic obstacles would remain.” While the European Union and Azerbaijan have supported the long-planned pipeline project, which could ease Russia’s grip on the EU’s gas market, the Kremlin has opposed it, citing environmental concerns and legalities.

In the current market, the pipeline would also be uneconomical, according to the Oxford institute, which said the cost of transporting Turkmen gas to Europe through a yet-to-be-built pipeline makes that gas less competitive than other options such as additional Russian shipments or liquefied natural gas.

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