/Azerbaijan and Turkmenistan Hold Keys to “Fairness” in Iran’s Loss of Caspian Sea Sovereignty

Azerbaijan and Turkmenistan Hold Keys to “Fairness” in Iran’s Loss of Caspian Sea Sovereignty

The dispute over sovereignty of the Caspian Sea began with the fall of the Soviet Union which had had a clearly defined Caspian border with Iran. In negotiations with post-Soviet nations, Tehran has insisted on either splitting the sea into five equal parts or jointly developing all its resources.

None of its neighbors have agreed to those proposals and three of them – Russia, Kazakhstan and Azerbaijan – effectively split the northern Caspian between each other using median lines.

Azerbaijan, however, has yet to agree on how to divide several oil and gas fields with Iran and Turkmenistan, including the Kapaz/Serdar field with reserves of some 620 million barrels of oil.

The three countries have tried to develop the disputed fields while at times using warships to scare off contractors hired by other sides. As a result, none of the disputed projects has made much progress.

Speaking after the signing on Sunday, all five leaders praised it as historic event, but provided little detail about provisions on splitting the seabed.

However, making it clear that the document is no final solution, Rouhani said border delimitation would require further work and separate agreements, although the convention would serve as a basis for that.

Trans-Caspian Pipeline

It remained unclear whether the convention adopted on Sunday would clear a way for the pipeline. Kazakh President Nursultan Nazarbayev said the document allowed pipelines to be laid if certain environmental standards were met.

Moscow has no outstanding territorial disputes but has objected, citing environmental concerns, to the construction of a natural gas pipeline between Turkmenistan and Azerbaijan which would allow Turkmen gas to bypass Russia on its way to Europe.

Ashley Sherman, principal Caspian analyst at energy consultancy Wood Mackenzie, said that although the signing itself was “an unprecedented milestone” for the region, the immediate implications for the energy sector would be limited.

“We consider a Trans-Caspian Gas Pipeline (TCGP) unlikely, even in the longer term”, he said in an email. “Clarity on the legal status will shine more light on the commercial and strategic obstacles to a TCGP, from infrastructure constraints to supply competition, not least from Azerbaijan itself.”

In the upstream sector, the increasing intent for joint projects in the south Caspian is very promising, Sherman said.

“Stranded fields and frozen exploration projects may well come back on the agenda,” he said.

However, with offshore Caspian oil and gas production already almost at 2 million barrels of oil equivalent per day, the impact from new fields – when disputes about their ownership are settled – might be limited.

“The scale of the projects in disputed waters is not comparable to the existing super-giant fields, from Azeri Chirag Guneshli and Shah Deniz in Azerbaijan to Kashagan in Kazakhstan,” Sherman said.

The Southern Gas Corridor has received a waiver from US sanctions against Iran’s energy customers, an expected win for the project, designed to transport 16 Bcm/year of Caspian natural gas to Turkey and southern Europe while bypassing Russia.

The language appeared in an executive order that President Donald Trump signed.

BP had been seeking a sanctions waiver for its development of Azerbaijan’s offshore Shah Deniz fields, the source of the Southern Gas Corridor’s natural gas. Iran’s NICO holds a 10% share in the second phase of Shah Deniz, potentially triggering US sanctions against Iran petroleum sector investment.

US energy sector sanctions being re-imposed November 4 will ban companies from the US financial system if they continue to do business with Iran. Countries that depend on Iranian oil imports are continuing to press the US government for waivers.

The order did not appear to settle a big question the oil market watchers have had since Trump announced in May that he would reimpose Iran sanctions: whether the ban on crude oil deals with Iran includes condensates. The White House order said in a list of definitions that “petroleum products” included “miscellaneous products obtained from the processing of: crude oil (including lease condensate), natural gas, and other hydrocarbon compounds.”

A former State Department sanctions adviser said the administration was likely looking to maintain flexibility on the status of condensates under the sanctions.

Trump’s order contained a “natural gas project exception” that describes the Southern Gas Corridor without naming it. The order referenced the Iran Threat Reduction and Syria Human Rights Act of 2012, a US law that describes an exemption for “the development of natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe.” The law says the corridor “provides to Turkey and countries in Europe energy security and energy independence” from Russia.

US sanctions against Iran’s oil buyers are expected to remove up to 1 million b/d from global oil supply. The US government is pushing countries to cut Iranian oil imports to zero, but officials have conceded that some limited waivers may be granted. Additionally, major customers, such as China and India, are expected to find ways to continue deals despite the sanctions.

“Our goal is to get the import of Iranian oil to zero,” a senior US administration official said Monday. “We are not looking to grant exemptions or waivers but are glad to discuss requests and look at requests on a case-by-case basis.”

Seabed is Still in Dispute

Delimitation of the seabed – which has caused most disputes – will require additional agreements between littoral nations, Iranian President Hassan Rouhani said.

For almost three decades, the five littoral states – Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan – have argued over how to divide the world’s biggest enclosed body of water.

And while some countries have pressed ahead with large offshore projects such as the Kashagan oil field off Kazakhstan’s coast, disagreement over the sea’s legal status has prevented some other ideas from being implemented.

The Trans-Caspian pipeline could ship natural gas from Turkmenistan to Azerbaijan and then further to Europe, allowing it to compete with Russia in the Western markets.

Exclusive Territorial Waters Established

“We have established 15-mile-wide territorial waters whose borders become state borders,” Kazakhstan President Nursultan Nazarbayev told a briefing after signing the Caspian convention.

“Adjacent to the territorial waters are 10 miles of fishing water where each state has exclusive fishing rights,” he said.

Nazarbayev also said the convention explicitly barred any armed presence on the Caspian Sea other than that of the littoral states.

A Final Resolution

It doesn’t make sense for Iran to hand over all its sovereignty without explicit economic relations with Azerbaijan and Turkmenistan. If these “Caspian States” had open borders and increased trade (effectively acting like a Common Market), then their prosperity would become Iranian prosperity. What Iran would lose in mineral rights, would be regained by trade in other (higher value) commodities.

I have always believed that the Caspian Accord should be part of a much larger context for the region and form the basis of creation of a Regional Union like the European Union. I have called that Union the Median Union. Iran and the Stans is what I am calling it.

In some ways the Caspian Accord is a missed opportunity. Not only was a regional union not formed, but also, very importantly there is NO central authority to manage the Caspian Sea and over sea fishing, environmental and mineral extraction. A Caspian Sea Authority is needed to ensure that all parties meet their obligations. And finally, several very large projects are completely ignored and that is ‘connecting’ the Caspian Sea to the Mediterranean (the so-called Manych Canal) and water exchange between the Caspian and the dying Aral Sea.

In effect this Accord falls short of its goals. If, a comprehensive arrangement is not met, and if for example Azerbaijan falls into U.S. orbit and also sanctions Iran; then it seems to me Iran has no choice but to simply Annex Azerbaijan and Turkmenistan to get back to its pre-Soviet, pre-Ayatollah status.

The resolution of the Caspian Sea sovereignty is PART of an overall regional resolution. The Accord falls short in doing that.