Oil and overproduction 3

Mark Jones markjones011 at tiscali.co.uk
Sat Jan 11 13:46:51 MST 2003

David Schanoes wrote
> If capitalism, in its origins, emerges dripping blood and dirt from every
> pore, then advanced capitalism covers both the blood and dirt in a bath of
> crude oil.

There is little point in discussing the political economy of oil without
first understanding and analysing the all-important issues of reserves. That
is more geology than economics. If we don't have an understanding of how
much oil is actually in the ground, all discussion is likely to be vacuous.

> In 2001, the Tengiz pipeline was opened in the Caspian sea
> area. With three billion dollars already invested, international oil
> companies intend to triple production from Kazakhstan's Tengiz field and
> double production from the offshore fields before the end of the decade.
>  The Caspian contains the world's ninth largest field of crude reserves.

Unfortunately, this is not the case. The Caspian oil bonanza is actually a
bust. On a personal note, I visited Tengiz ten years ago when Soviet
president Mikhail Gorbachev announced a joint venture with Chevron to
develop it. It is an inhospitable place. For reasons set out below, the huge
early optimism about Tengiz has turned out not to be justified.

The Caspian is a salt-water inland sea or lake covering about 375 000 km2,
bordered by Iran to the south and the Caucasus to the northwest. The Volga
River flows into it from the north, forming a large delta near Astrakhan,
but evaporation is sufficient to counter the influx, leaving it some 30m
below world sea-level. It is flanked to the north by Russia itself, followed
clockwise by Kazakhstan, Turkmenistan, Iran, and Azerbaijan. In geological
terms, it is made up of  several diverse provinces. To the south there lies
a deep Tertiary Basin in the fore-deep of the Elburz Mountains. It is
followed to the north by the proto-delta of the Volga that runs across the
Caspian as a fairly narrow belt from Azerbaijan to Turkmenistan. That gives
way to a Mesozoic basin, running out of Kazakhstan, which in turn adjoins
the southern part of a large Palaeozoic basin, known as the Pre-Caspian
Basin, whose axis lies to the north of the Caspian.

Early oil activities were concentrated on the Aspheron Peninsula of
Azerbaijan around the town of Baku on the proto-delta of the Volga.  Oil and
gas, generated in lower Tertiary deltaic sediments, has migrated upwards,
mainly along fault-planes, to accumulate in a thick sequence of Miocene and
Pliocene sandstone reservoirs at fairly shallow depths.  A peculiar feature
is the so-called mud-volcano, in which gas seepages carry mud to the surface
giving volcano-like features, several hundred meters high, which
occasionally ignite and explode. Extensions of this same geological province
extend northwards into Chechnya, where many people still make a living
refining oil from shallow wells and seepages in primitive, dangerous and
very polluting home-made stills.

Baku was one of the great world oil centres during the late 19th Century.
The Nobel Brothers of Sweden held a dominant stake, later joined by the
Shell Oil and Rothschild interests that financed a pipeline to the Black
Sea. Joseph Stalin was politically formed in Baku as a workers leader in the
early oilfields.

Soviet geologists were able to drill holes to gather critical information
according to scientific criteria, whereas their western counterparts had to
pretend that every borehole had a good chance of finding oil. In the years
following the Second World War, they brought in the major producing
provinces of the USSR, finding most of the giant fields within them. Baku
was by now a mature province of secondary importance, although work
continued to develop secondary prospects and begin to chase extensions
offshore from platforms. The Soviet Union had ample onshore supplies, which
meant that it had no particular incentive to invest in offshore drilling
equipment. The Caspian itself was therefore largely left fallow, although
the borderlands were thoroughly investigated.  Of particular importance was
the discovery of the Tengiz Field in 1979 in the prolific Pre-Caspian basin
of Kazakhstan, only some 70 kms from the shore. Silurian source-rocks had
charged a Carboniferous reefal reservoir at a depth of about 4500m beneath
an effective seal of Permian salt. Initial estimates suggested a potential
of about 6 Gb (billion barrels), but the problem was that the oil has a
sulphur content of as much as 16%, calling for high quality steel pipe and
equipment, not then available to the Soviets. Development was accordingly

The fall of the Soviet regime in 1991 opened the region to western
investment. The oil industry in particular was enthusiastic that here might
lie a “new frontier” to offer them another lease of life, having effectively
lost the Middle East through expropriation, and having thoroughly explored
the rest of the accessible world. A glance at the map of the unexplored
Caspian Sea surrounded by oilfields was enough to capture the attention of
western strategists, especially in Washington, who began to hope that in the
Caspian they could find an escape from the stranglehold of the Middle East
in their desperate quest for access to foreign oil supply. These notions and
ideas soon gained a momentum of their own, far removed from any thorough
scientific analysis. There were many motives to exaggerate the prize, as
strategists sought to shift foreign policy and mobilize military capability.
Before long, the Caspian had won the image of being a second Saudi Arabia,
floating on oil.

A second look at the map reveals that it is not easy to get the oil out of
this landlocked area, remote from western markets. But this was manna from
heaven for various geopolitical ‘experts’, who could now dedicate their
think-tank efforts to designing devious strategies for controlling the
transit countries and building pipelines, of course taking the claimed
geological potential for granted. As many as eleven schemes were considered,
each with different obstacles. The obvious route was through Iran, but this
would have given Tehran a critical control on future US supply, which was
not thought desirable. Another was to the Black Sea for shipment through the
Bosphorus in tankers, but the Turks objected that this would be an
environmental catastrophe waiting to happen. Existing pipelines through
Russia could be used and expanded, but that gave the Russians critical
control. The Chinese too, who recognise their desperate dependence on
growing imports, entered the scene with a proposal for a pipeline in their
direction. Then, there was Afghanistan, and a proposal by the American
company, Unocal, for a gas pipeline from Turkmenistan to the Indian
sub-continent. Another heroic idea was to pipe it to the Black Sea for
trans-shipment to Bulgaria, for whom environmental issues are not a
particular priority, and then into another pipeline constructed through the
Balkans to the Adriatic coast of Albania, passing through Kosovo, again a
route not without its hazards..

The preferred US route is through Azerbaijan, Georgia and Turkey, which
would be no mean undertaking, having to cross high mountain ranges, occupied
by disaffected Kurds and others.

All of this is a replay of the 19th c Great Game when Britain and Russia
vied for influence in Central Asia.  However exciting this may be, it now
begins to looks as if the Caspian imay not live up to expectation, as ten
years of exploration and development by western companies reveal its real
and modest potentials.

BP took a pioneering role with Statoil, its Norwegian partner, when the
Caspian opened. Interest was at first aimed at the offshore extensions of
the Baku trend, where a number of prospects, already identified by the
Soviets, were successfully tested, leading to the development of the Azeri,
Chirag and Guneshli fields. Some seventeen “wildcats”, as exploration
boreholes are colourfully termed, have been drilled since 1992, finding some
3 Gb of oil, which while useful, is not enough to have any particular world
significance. BP also investigated the Tertiary deep to the south, and
finding the Shah Deniz a gas-condensate field. Evidently high temperatures
on deep burial have broken down the oil into a gas, containing a high
dissolved liquid content, as might be expected. This area verges on waters
claimed by Iran, and seismic surveys have been halted by Iranian gunboats.
It is significant that Russia’s Lukoil, which was a partner in the
Azeri-Chirag-Guneshli fields has decided to sell out to a Japanese company,
desperate for access to oil; while Exxon-Mobil has withdrawn from Azerbaijan
altogether. Evidence to-date suggests that Azerbaijan has reserves of about
12 Gb, and since the larger fields are almost always found first, it is
unlikely that new exploration will bring the total to more than about 15
Gb., if that.

Kazakhstan also soon attracted serious interest. Chevron and Exxon agreed to
develop the Tengiz Field. It faced many operating and technical challenges,
but has managed to build production to about 250 000 b/d, which is exported
partly by rail and partly through the Russian pipeline system. One of the
problems has been the disposal of the massive amounts of sulphur that have
to be removed from the oil by processing.  Plans to increase production 480
000 b/d by 2005 have now been shelved, adding another nail to the ‘Caspian
bonanza’ coffin.

The greatest interest of all however attached to a giant prospect, termed
Kashagan, which was identified in the shallow waters of the northern Caspian
off Kazakhstan. Like Tengiz, it relied of a high sulphur Silurian source,
deep Carboniferous carbonate reservoirs and Permian salt seal. It had a huge
upside thanks to its sheer size, offering  a certain potential to become
perhaps the world’s largest oilfield. Jack Grynberg, the well-known New York
promoter, managed to strike a deal with the Kazakh President, leading to the
entry of a largely European consortium, comprising BP-Statoil, the Italian
company Agip, British Gas, the French company Total (now TotalFinaElf), and
minor American interests. Grynberg retained for himself a so-called
‘overriding’ royalty.  But the initial enthusiasm waned when the companies
began to get into the details. In geological terms, there were uncertainties
if the reservoir would be one large platform or if it would turn out to be
made up of individual reefs separated one from another by rocks lacking
porosity and permeability, as experience from Tengiz would suggest. Seismic
surveys showed that the integrity of the salt seal was weak in parts of the
structure. The companies also found that they faced monumental operating
challenges: the waters were shallow making it difficult to bring in and
position equipment, while also posing environmental threats to the breeding
grounds for sturgeon shoals supporting the Russian caviar fisheries. If that
was not enough, a gruesome, chilling wind blows in winter covering
everything in ice. Nevertheless, the companies have succeeded, at astronomic
cost, in drilling three wildcats, on what presumably are the most favourable
parts of the prospect, announcing that they had found between 9 and 13 Gb.
BP-Statoil decided to withdraw, exposing themselves to a law suit filed by
Mr Grynberg, who was not pleased to miss his overriding royalty.  This is
another big nail in the coffin, although the remaining companies now led by
Agip soldier on.

In addition to these main projects, the Russians themselves have made a 2 Gb
discovery in the northwest part of the Caspian, and Turkmenistan has
announced an oil discovery of uncertain size off their mainly gas-prone

In short it has now become clear that the offshore Caspian has been a great
disappointment. Exactly how much of disappointment is hard to say as the oil
statistics are even more unreliable than usual. Total reserves for the
offshore probably stand at about 25 Gb, with new exploration offering
potential for say another 5 Gb, a good deal less than the 44 Gb Mean
estimate proposed in a study by the US Geological Survey in 2000 (and vastly
less than often publicised wild estimates, extending up to 200 Gb in the US
and European press, through 2000-2001).

Offshore production to-day is mainly confined to Azerbaijan where it
probably stands at about  250 000 b/d.  Given the withdrawal of the major
companies, the monumental technical and operating challenges, the uncertain
contractual regime and export pipeline obstacles, it is difficult to be
sanguine about the future rise of production. Realistically, it seems
doubtful if it will be possible to reach a maximum of more than, say, about
1.5 Mb/d in ten to fifteen years time. If this plateau was achieved, and it
would be effectively constrained by pipeline capacity, it might last another
ten years before the onset of gradual decline at the then depletion rate.

The United States currently imports some 11.6 Mb/d, approximately 60% of its
consumption.  If demand were held static by recession or government policy,
imports would still have risen to about 17 Mb/d by 2015 in the face of the
continued decline of indigenous supply. About 10% of its needs could come
from the Caspian offshore in the unlikely event that it were able to have
exclusive call upon it. Any even that would last only for a few years.

The Caspian has proved a chimera, dashing hopes that it would lessen US
dependency on the Middle East. This realisation perhaps explains in part why
it now turns its guns on Iraq.  However, present assumptions about future
Iraqi oil output may also, and for similar reasons, turn ou to be premature
and highly optimistic.


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