BURSTING BAKU'S OIL BUBBLE

After languishing for years in the Soviet doldrums, Baku's oil industry is poised for a dramatic comeback on the international stage. A sheaf of lucrative contracts with Western oil companies has fuelled hopes that the Azerbaijani capital may soon shrug off its troubled past and enjoy a second heyday. However, experts are pouring cold water over heated claims that vast untapped resources lie deep under the Caspian seabed.

In the early 1900s, Baku stood at the heart of the world's first oil-producing region. But, with the discovery of larger or more accessible oil deposits in other parts of the globe, the city lost much of its strategic significance. Soviet industrial policies ensured its eventual decline with a massive shift of emphasis from the Caspian basin to the heavy oil deposits of Siberia.

It is unlikely that Soviet marine engineers were unequal to the problems of extracting oil from the Caspian. On several occasions, long-term research plans examined the development of deep-water fields but proposals were always rejected on the grounds of poor potential returns.

Lukewarm Soviet interest in the Caspian Sea can be ascribed to disparate economic, ecological and political factors. The most important of these are, however, economic. The lack of sufficient resources and the high cost of extraction conspired to leave the Caspian oil fields largely unexploited.

There is no shortage of documentary evidence to support this theory. In 1988 Elm scientific book publishers released a report by the Soviet Union's leading oil geologists who concluded that existing and explored fields in the Azerbaijan sector of the Caspian Sea could yield an estimated 27 billion barrels of crude oil.

The US Energy Information Administration has put the region's proven oil reserves at somewhere between 3.6 and 12.5 billion. These figures pale in comparison to the reserves of the current world leader, Saudi Arabia, which are thought to total around 260 billion barrels (US EIA). Figures released by the Azerbaijan International Operating Company (AIOC), an international consortium, predict peak production will reach 800,000 barrels per day within 15 years. Saudi Arabian oil fields produced an average of 7.8 million barrels per day throughout 1999.

Furthermore, extracting oil from the Caspian Sea is an expensive business. Heavy soil, deep seas and the complicated geological nature of the deposits themselves make alternative oil resources more attractive.

Subsequent events have effectively demonstrated that much of the talk of Caspian oil is pure bluff. Large-scale geological exploration has as yet failed to find proof of sufficiently large deposits in any of the existing fields. The so-called "Deal of the Century" signed in 1994 by the AIOC introduced the "myth of Azerbaijan oil extraction". This pompous title together with the involvement of the world's leading economic powers and oil companies was designed to give credence to tales of super-rich oil fields in the Caucasus. But, if reserves are not so extensive, how can this level of Western interest be explained?

The first reason is, predictably, political. The South Caucasus represents a significant geopolitical region, linking the Black and Caspian Seas and providing a "key" to Central Asia. Moreover, the West is trying to limit Russia's influence in Europe while at the same time restricting the number of potential allies for Iran. Investment in Azerbaijan's economy and natural resources offers a reliable shortcut to achieving both these goals.

The interest of the foreign oil companies - the driving-force behind the creation of the "Caspian Phantom-Region" - is easily explained. These oil companies are, after all, commercial entities dependent on profit for success. Their massive investment in Azerbaijan's oil industry is principally motivated by profit. All of the ventures are joint-stock companies and shareholders of these companies derive their main profit not from increasing dividends based on successful commercial activity, but from the rising price of the shares themselves. Share prices are dictated not by real economic indicators but by encouraging forecasts.

This is the very essence of Western business investment in Azerbaijan. By participating in high-profile Caspian Sea projects and issuing rosy reports of "great resources", such companies improve their stock image, generating an instant profit without pumping a single barrel of oil. In fact, one could argue that to begin seriously extracting oil would be counter-productive given the danger that the true extent of oil reserves would then be exposed.

So how do the Azerbaijani partners benefit from the contracts they are only too willing to sign? Their interests fall into two categories: the interests of the country and the concerns of the ruling elite.

Azerbaijan desperately needed these contracts. Only two or three years ago, the country was poverty stricken, racked by internal divisions and defeated militarily in the disputed Nagorno-Karabakh enclave. The new political leadership quickly realised that success would come not on the battlefield but through diplomacy. And to exert leverage in the diplomatic arena requires strong allies. Russia clearly would not fulfill this role, so Azerbaijan's only source of wealth - her oil - was sacrificed to ensure a closer relationship with the West. Of course, large-scale inward investment into the oil industry would also assist Azerbaijan's economic recovery.

Initially, national interest coincided with the interests of the political elite in Azerbaijan, but some unscrupulous government officials have since focused on exploiting their bureaucratic positions for maximum short-term profit, overlooking the long-term interests of the country in the development of the oil industry.

Claims that the Caspian Sea will one day become a major player in the global oil market are at best erroneous. Beyond the technical difficulties still hindering full exploitation of existing oil fields, the fact remains that those reserves are simply not as extensive as people - including the Azerbaijanis - want to believe. The reserves are sufficient to provide the country with energy for a long time ahead and to ensure the development of a large-scale oil industry. But they are not sufficient to secure Azerbaijan a leading role on the international stage.

Elmar Gusseinov is editor-in-chief of Monitor magazine in Baku.