Caspian Sea Agreement and the International Energy Market

In an interview to Business Standard,1 Fatih Birol, executive director of the International Energy Agency (IEA), said that gas producers were betting big on the Indian market. This is indeed understandable given that the government has declared its intention of moving the economy towards a gas-based one. It is in this context that an event in the Eurasian heartland acquires significance. On August 12, 2018, leaders of the five Caspian Sea littoral – Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan – met in Aktau, Kazakhstan, to sign a Convention on the Legal Status of the Caspian Sea. This signalled an end to a two-decade long dispute over the Caspian’s legal status, i.e., whether it is a sea or a lake.

According to The Economist, the Convention arrived at a compromise. It chose to treat the Caspian’s surface as a sea and gave the littorals jurisdiction over waters extending up to 15 nautical miles (nm) from their coasts as well as fishing rights over an additional 10 nm. But the Convention did not reach a settlement on the precise formula for allocating the sea bed and its mineral deposits; these are to be decided by the littoral countries on a bilateral basis. Most significantly, the Convention permits the construction of pipelines, which only require the approval of the countries whose sea beds they transit, subject to environmental provisions, and forbids non-littorals from deploying military vessels in the waters of the Caspian.2 Thus, while the Convention has certainly succeeded in easing some of the contentious issues, other major concerns have been left to be addressed by the countries concerned on a bilateral basis, the most important in this regard being the division of the seabed.3

The Caspian Sea has been an area of contention and debate for nations bordering it since the break-up of the Soviet Union. While all these countries are richly endowed with natural resources, the sea bed of the Caspian contains rich reserves of hydrocarbon resources. According to the US Energy Information Administration (EIA), the region is estimated to contain 49 billion barrels of oil and 292 trillion cubic feet (8.3 million cubic metres) of natural gas in its sea-bed.4

Historically, the Caspian Sea was controlled by Iran, but it lost the northern part to the Soviet Union in the early 19th century.5 After the disintegration of the Soviet Union, the newly independent former Soviet republics in the region also demanded a share of the resources. Iran has been opposing a settlement based on the median line approach, since that would leave it with only about 11 per cent of the waters, the smallest share. Moreover, its portion of the Caspian Sea contains less hydrocarbon reserves than those of Kazakhstan and Turkmenistan. Hence, Tehran wanted the Caspian to be divided into five equal parts of 20 per cent each, or alternately, evolve a mechanism to jointly develop the resources, partly because the reserves in the southern Caspian are situated very deep and hence difficult to access,6 and partly to circumvent the legal obstructions imposed by the recent US sanctions regime.

As the region’s dominant player, Russia too saw the division of resources as a source of increasing competition for its gas exports to Europe. It has therefore used environmental issues to block underwater pipelines from being constructed, such as the Trans-Caspian Gas Pipeline from Turkmenistan to Azerbaijan and thence to Europe.

Another major concern for Russia and Iran was that if the Caspian were to be considered a sea, it would become governed by international maritime law, especially the United Nations Convention on the Law of the Sea (UNCLOS). That, in turn, would give outside powers access to these waters, which the littoral states want to share only amongst themselves. These concerns proved to be a major roadblock, leaving most of the disputed oil and gas fields undeveloped over the past two decades. But the imposition of US sanctions, coupled with the common concern of preventing external powers, namely, the US and NATO, from expanding their influence in the region, have prompted Iran and Russia to arrive at a common position on how to classify the water body.

Although the agreement has brought an interim solution to the discussions on dividing the resources, major differences on the division of the seabed, as well as conflicting strategic interests such as delineation of the sea bed, division of hydrocarbons in the sub-soil, and construction of trans-border oil and gas pipelines remain. If these issues had been included in the negotiations, it is unlikely that even the current interim agreement would have been reached.

Does the interim agreement on the Caspian have any relevance for India? While the possibility of transporting gas from the Caspian to the subcontinent has technically increased, the cost and technical viability of building a pipeline continue to be a consideration. Any pipeline would have to traverse a distance of at least 1500 km, although existing pipeline networks in Iran could be used to offset some of the cost. While it remains an option for the future, much will depend on the cost of the landed price of gas (Caspian oil is an unlikely import). Eventually, the value of the Caspian energy reserve lies in its potential to add to global reserves of oil and gas, as was the case with US shale resources, which, in turn, could bring down costs.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. Shine Jacob, “Africa should learn from India on solar use, says IEA's Fatih Birol,” Business Standard, September 3, 2018, https://www.business-standard.com/article/economy-policy/africa-should-l...
• 2. M.L., “Is the Caspian a sea or a lake?”, The Economist, August 16, 2018, https://www.economist.com/the-economist-explains/2018/08/16/is-the-caspi...
• 3. Caspian Sea: Five countries sign deal to end dispute, BBC News, August 12, 2018, at https://www.bbc.com/news/world-45162282.
• 4. “Overview of oil and the Caspian Sea region”, Energy Information Administration, US DoE, August 26, 2013, https://www.eia.gov/beta/international/regions-topics.php?RegionTopicID=CSR
• 5. Andrew E. Kramer, “Five nations agree to divvy up resources-rich Caspian Sea,” The Sydney Morning Herald, August 13, 2018, at https://www.smh.com.au/world/europe/five-nations-agree-to-divvy-up-resou....
• 6. Kamyar Mehdiyoun, “Ownership of Oil and Gas Resources in the Caspian Sea”, The American Journal of International Law, Vol. 94, No. 1 (January 2000), pp.182-83.