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The Caspian neither sea nor lake, apparently

An agreement of sorts has been reached on how to carve up the Caspian

The five countries bordering the Caspian Sea have come up with a fudged definition of its status, which while potentially confusing, has at least broken an impasse over how to divide up its waters and seabed. In doing so it could jolt some stalled oil and gas developments back into life.

For years, the nations around the Caspian have haggled over whether the world's largest inland body of water should be classified as a sea or a lake. In the end, following a mid-August meeting in the Kazakh port of Aktau, those countries - Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan—agreed that it should be classified as neither and be subject to a special set of rules.

It's not an academic exercise. Until now, any projects that crossed or straddled borders, such as pipelines or oilfield developments, faced huge difficulties in getting off the ground, because of intractable border demarcation disputes and uncertainty over the legal status of the Caspian beyond clearly established territorial waters.

Iran wanted the Caspian to be classified as a lake, because under international law, its waters and seabed would then be divided equally among the five countries. That would have benefitted Iran, with its relatively limited Caspian coastline. But the other four countries wanted it classified as a sea, which would make it subject to the United Nations' International Law of the Sea, and, as such it would not be divided up equally and some of its waters would remain open to all.

The compromise deal, which still requires a lot of fleshing out, does allow freedom of access for all of its bordering states to the Caspian's waters outside agreed territorial waters. That element has attracted domestic Iranian criticism of the Tehran government, due to fears that this could enable Russia to rule the Caspian's waves at the expense of Iran.

However, under the pact there is an agreement to divide the seabed between the five countries. There is little detail on how that will be done, but, if it happens, it may help unlock development of some oil and gas reserves, which had hitherto been in disputed or ill-defined areas.

Bilateral agreements

The pact also paves the way for maritime boundary disputes and cross-border projects to be resolved by the two countries directly involved, rather than by all Caspian states, as has been the case until now. Again, this could speed up resolution of border disputes and define the location of oil and gas acreage in a given country.

But, the mechanisms for achieving this are yet to be established and, in any case, this is unlikely to unleash a fresh wave of mega-projects, such as the BP-led Shah Deniz gas project and Total's Absheron developmentboth of which are in undisputed Azeri watersor Kazakhstan's Kashagan field.

Russia and Kazakhstan already have a bilateral agreement on resource-sharing in place, while discovered reserves contested by the other three countries are relatively small.

"Offshore Caspian production is already almost 2m barrels of oil equivalent a day of oil and gas from some of the world's largest upstream developments. The scale of the projects in disputed waters is not comparable to the existing super-giant fields," Ashley Sherman, a Caspian upstream analyst at Wood Mackenzie, said in emailed remarks.

While US sanctions hit-Iran may be interested in expanding homegrown oil resources to compensate for lost imports, other Caspian states may struggle to garner investment for hydrocarbons projects that would need to compete with substantial supply already heading to Europe from Azerbaijan. In short, supply from smaller projects, potentially costing more per barrel to develop, may not have an obvious home beyond local markets.

However, some observers think the pact could make some difference if it signifies a greater willingness for cooperation among Caspian countries.

"The increasing intent for joint projects in the south Caspian is promising. Stranded fields and frozen exploration projects may ultimately come back on the agenda," Sherman said. He noted that the Serdar/Kapaz field, disputed by Azerbaijan and Turkmenistan, is the largest discovered resource at stake. The field could hold upwards of 1bn boe of recoverable resources, though it has yet to be fully tested.

Pipeline problems

Turkmenistan's hopes of supplying gas to Europe via a long-mooted Trans-Caspian Pipeline (TCP) feeding into the Southern Gas Corridor project could founder for similar reasons.

I don't think the agreement in the form that has emerged moves us on substantially," Simon Pirani, a research fellow at the Oxford Institute of Energy Studies (OIES) told Petroleum Economist. "Even if the political obstacles were all cleared upwhich they haven't beenother obstacles remain."

Russia has been lukewarm on the TCP, not least because it could provide competition for its own gas exports to Europe. While the Caspian pact would seem to imply that a TCP running solely through Turkmen and Azeri waters would just require an agreement between those two countries, Russia has hinted it may try to object on environmental grounds.

Even if that fails, there are question marks over the TCP's viability. Pirani wrote an OIES paper, published in July, in which he calculated that the cost of building a pipeline and transporting Turkmen gas to European markets would not be economic at current gas prices. It is also unclear whether Turkmenistan would have sufficient extra gas to supply it, given most of its existing gas is tied up in export contracts with Chinaa state of affairs the Turkmen government is keen to change, but doing so seems challenging.

So, with cooperation between Azerbaijan and Turkmenistan is currently far from smooth as well, prospects for the TCP remain bleak for now.

More likely could be the construction of short pipelines connecting the westernmost Caspian oilfields in Turkmen waters to processing plants and pipelines serving the easternmost Azeri projects, such as BP's Azeri-Chirag-Deepwater Gunashli (ACG) field. At present, Pirani said much of the gas from those Turkmen oilfields is currently being flared, while Azerbaijan is short of gas domestically, despite its massive gas export projectsso this could be a relatively low-cost benefit to both countries.

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