Underlying the one-year anniversary in mid-August of the signing of the ‘Convention on the Legal Status of the Caspian Sea’ is one of the greatest oil industry swindles in recent years. When representatives of the five Caspian littoral states meet on the 11th and 12th of August, Iran intends to seek some redress from Russia on Moscow’s manoeuvring last August. The Islamic Republic believes that it was robbed of its historical rights in the Caspian, conned out of a US$50 billion per year income, and left without Russia’s support against the re-imposition of U.S. sanctions.
Little of any apparent consequence was decided last August when the five Caspian littoral states – Russia, Iran, Kazakhstan, Turkmenistan, and Azerbaijan – signed the ‘Convention on the Legal Status of the Caspian Sea’. The limited publicity that surrounded the signing stated only that the agreement stipulated that relations between the littoral states would be based on the broad principles of national sovereignty, territorial integrity, equality among members, and the non-use of threat of force.
It refrained from specifically going into details about share allocations in the Caspian Sea resource and talked only vaguely about giving the area ‘a special legal status’. However, a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com that there was a secret second part to the deal that has proven explosive for the perennially fractious relations between the Caspian states.
At stake is the massive Caspian Sea hydrocarbons resources prize that has been fought over since the dissolution of the USSR in 1991 resulted in three additional partners – Kazakhstan, Turkmenistan, and Azerbaijan – to the original partnership of Russia and Iran. Prior to the fracturing of the USSR into its constituent independent states, Iran and the USSR had struck the original agreement in 1921 to split all ‘fishing rights’ in the Caspian area 50-50. This was amended in 1924 to include ‘any and all resources recovered’, meaning in practical terms that all hydrocarbons resources would be shared equally between Russia and Iran. “Iran should have said back then that Russia should have shared its Caspian stake with the three former USSR states, but it [Iran] was content to wait for the official legal dispute to be settled,” underlined the Iran source.Related: Chinese Rare Earth Exports Tumble As Trade War Accelerates
At stake is the allocation of revenues from the wider Caspian basins area, including both onshore and offshore fields, that is conservatively estimated to have around 48 billion barrels of oil and 292 trillion cubic feet (Tcf) of natural gas in proved and probable reserves. Around 41 percent of total Caspian crude oil and lease condensate and 36 percent of natural gas exists in the offshore fields, with an additional 35 percent of oil and 45 percent of gas estimated to lie onshore within 100 miles of the coast, particularly in Russia’s North Caucasus region.
The remaining 12 billion barrels of oil and 56 Tcf of natural gas are believed to be variously located further onshore in the large Caspian Sea basins, mostly in Azerbaijan, Kazakhstan, and Turkmenistan. The area accounts for an average of 17 percent of the total oil production of the five littoral states that share its resources, on average totalling 2.5-2.9 million barrels per day (mbpd).
Before the ‘Convention on the Legal Status of the Caspian Sea’ agreement was signed last August, oil output targets for each country were set three months in advance, with all revenues paid into a central Caspian oil account, which was then split in equal proportions of 20 percent between the five littoral states, said the Iran source. The revenues, at least prior to the re-imposition of sanctions against Iran by the U.S. late last year, usually comprised 95 percent U.S. dollars and Euros, but with some local currencies in the mix.
Against this backdrop, the legal designation of the Caspian as either a ‘sea’ or a ‘lake’ would have far-reaching repercussions on the assignment of revenues from it. If it was designated a sea then coastal countries would apply the ‘United Nations Convention on the Law of the Sea’ (1982), in which event each littoral state would receive a territorial sea up to 12 nautical miles, an exclusive economic zone up to nautical 200 miles, and a continental shelf. In practice, this would mean that countries such as Turkmenistan and Azerbaijan would have exclusive access to offshore assets that Iran would not be able to access.
If it was designated a lake – and this was the informal designation before the August agreement – then the countries could use the international law concerning border lakes to set boundaries, by which each country effectively possesses 20 percent of the sea floor and surface of the Caspian.
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