Caucasus and Caspian Sea Region

1. Caucasus and Caspian Sea Region Azerbaijan Kazakhstan Source: Steve LeVine, The Oil and the Glory foreignpolicy.com WikiLeaks.org

2. map

3. Soviet days • Baku • Overtaken by Volga basin • Deterioration of onshore fields • 1947: a new start: Oily Rocks, first offshore oil city • CIA report 1955: Oily Rocks had become Azerbaijan’s largest producer of crude (about 14mbb/y)

4. …..Baku • Soviet geologists soon find 3 other offshore fields east of Oily Rocks- even richer • Cia: “The future of the Baku area in the production of oil depends largely on the offshore operations” • But the fields are up to 4 miles under water • Soviets lack technology to drill in such deep water-and lack interest in view of “second Baku” (Volga basin and western Siberia)

5. Nixon, Détente and US-Soviet Trade • Cold War in trade: US embargo on export of oil field machinery and equipment for about 20 years • Trade resumed during Nixon presidency • June 1973: US-USSR Trade and Economic Council (USTEC) established during Brezhnev’s visit to Usa • Armco Steel (Ohio) in Soviet trade pact: 5 year protocol involving ferrous metals and offshore oil equipment

6. …détente • 1976: Baku is provided with first deep-sea oil rig • Technically a violation of US law which linked trade to a loosening of Soviet restrictions on Jewish emigration – the Norwegian link • Trade with USSR will later suffer from Soviet invasion of Afghanistan and Reagan Doctrine

7. The 1980’s • 1985: Mikhail Gorbachev’s rise to power • Perestroika and economic requirements • James Giffen and the American Trade Consortium • an oil company is needed to convert ruble profits to dollars and repatriate the cash home • Giffen’s interest coincides with Chevron’s

8. Chevron’s involvement • Chevron and George Keller • Through early 70s plenty of oil and not concerned in finding more • Mid-80s: price collapse and Saudi Arabia’s cancellation of concession • North Sea finding and Nigeria-Angola properties not particularly meaningful-reserves needed

9. Chevron Searching for “the Perfect Oil Field”- Tengiz • “An oil field that would generate cash in a hurry” • Gathering information from US Geological Survey, Cia reports and satellite photographs • Tengiz field–Kazakhstan, NE edge of Caspian Sea (onshore, 18km wide, 23km long); promising off-shore actvity • Oct. 1987: discussions start in Moscow. Soviets reluctant to give up Tengiz because Caspian oil resources are critical to USSR’s strategic future

10. Tengiz • Visit to Tengiz: the Kazakhs insist that the oil fields are theirs and Moscow cannot decide unilaterally • Deeply resentful of decades of Soviet imperiousness over minorities • Very sensitive about environment (Caspian home to giant sturgeon) • Livid over nuclear testing in the northern region of Semipalatinsk (2 generations of deformed children)

11. Chevron benefits from political developments • Signs of discontent in the USSR and Eastern Bloc • Increasing demands for independence in Eastern Europe • Open revolt in Baltic States • Civil war in Azerbaijan • Demonstrations in Kazakhstan (Soviet 1989 nuclear tests)

12. …political developments • Gorbachev in search of money to face critical civilian needs • 1990: Gorbachev signs in Washington: • 1-arms reduction agreement with G. Bush • 2-protocol with Ken Derr awarding Chevron exclusive rights to negotiate for Tengiz

13. The Challenger: British Petroleum • State’s 51% share sold by Margaret Thatcher in 1987: BP becomes private concern • Negative trend in late 80s: starts search for largest elephants • Caspian sea the most inviting • Strategy: dealing directly with Nursultan Nazarbayev • BP-Kazakh protocol: a consortium of majors led by BP to negotiate with K. for Tengiz

14. Troubles for the British • Nazarbayev in US-trip paid by Chevron • Gorbachev convinced that deal with Chevron: • is precondition for any improvement in relations with US • will convey benefits by Consortium companies • G. Bush: “There is no better way to attract investment than to sign one big contract. Chevron in one of our biggest companies”

15. BP gives up • BP summoned to Moscow: ”if you proceed, you will never get a deal in Russia” • Giffen to Nazarbayev: “if we scare off Chevron, then not a single western investor will ever come” • (At the time, Condoleezza Rice is member of Chevron’s board of directors) • BP steps back, but will be rewarded in Baku

16. Dissolution of Soviet Union1991 • Gorbachev’s power slipping, economy worsening • Nazarbayev: from Communist leader (3rd after Gorb. and Eltsin) to Kazakh nationalist • December: N. declares independence of K-the last of Soviet Republics to do so • N. brings together leaders of former republics to form Commonwealth of Independent States (CIS) • Gorbachev resigns; Soviet Union officially dissolves

17. Long and exhausting negotiations • Dutch dealmaker Johannes Deuss • Connection to Oman • Smuggling oil to South Africa • 1991- Oman oil Co. owned jointly Deuss-Oman • Deuss’ trip to Kazakhstan • The Kaz. problem: short of corn and barley to feed cattle (10m cattle, 40m sheep, 2m horses, 3.5m pigs) • Nov. 1991- Oman’s loan-to be repaid with oil • Part of the deal: Deuss is made K’s oil adviser • First task: to help move along talks with Chevron

18. The “foundation agreement” • Nazarbayev under pressure • Key issue: percentages • Home complaints (Russia’s campaign) • N. about to make first post-Soviet visit to Washington and meet G. Bush • May 18, 1992: “foundation agreement” • Statement of terms, not final agreement • Next day: N. has working lunch with Bush

19. The final round • April 1993: final agreement signed • Meaning: • For Kazakhstan: economic foundation of statehood (80% of profits) • For Chevron: worldwide reserves raised by 50%; status as oil multinational restored

20. Back to Azerbaijan Struggle for Baku (Soviet era) • BP wasted no time in getting to Baku, seeking compensation for loss of Tengiz • Troubled situation in region dominated by Caucasus mountain range-50 ethnic groups speaking more than 40 languages • Chechens chafing for independence • Demonstrations in Georgia • War between Azerbaijan and Armenia over Nagorno-Karabakh

21. Baku in the late 80s • “Onshore industry dead, offshore in trouble, no money from Moscow” • The oil boss: Kurban Abassov • 1990: letter of intent to BP-exclusive rights to negotiate for 1 of 3 potential elephants, (Azeri field) • Oct. 1990: agents of oil multinationals flock to Baku Oil Industry Exhibition during which final agreement with BP should be signed • Instead, PM declares Azeri field to be put out to international bid • BP versus Amoco (former Standard Oil of Indiana)

22. Post-Soviet Era • Amoco granted 1 field and BP 2 fields • American Azeris and “geopolitical sense” • Margaret Thatcher in Baku (Sept. 1992) • Both form strategic partnerships with other companies-Unocal, Pennzoil • Early ’92-June ‘93: ongoing war with Armenia, home civil strife, Heydar Aliyev proclaims himself President, asks for outside help • Hekmatyar and a squad of US veterans of Special Forces come to the rescue

23. “The Contract of the Century” • The odds against Azer: Armenian lobby in Washington; Moscow unwilling to give up oil industry in the Caspian • US companies lobby Clinton Administr. for help-Aliyev makes clear that US support is part of the deal • Sept. 20 1994:“Contract of the Century” signed for Baku offshore wells-10 companies representing 6 countries • Slices from Az. share to other countries to build a diplomatic shield

24. Work in ProgressAzerbaijan: Israel’s new airport? • http://www.foreignpolicy.com/articles/2012/03/28/israel_s_secret_staging_ground • The background: security problems remain unchanged: • unresolved relationship with Armenia over Nagorno Karabakh • OSCE arms embargo • strategic location on Iran’s northern border

25. WikiLeaks • 2009 report by deputy chief of mission US embassy Baku to DoS titled “Azerbaijan’s discreet symbiosis with Israel” • Report based on “Embassy interactions with Israeli colleagues in Baku and with Azerbaijani MFA officials we have demarched on Israeli issues” • Contents of report: • quotes Az. President Ilham Aliyev as describing his country’s relationship with Israel as an iceberg “nine-tenths of it below the surface” • extensive relationship between the countries’ intelligence services

26. …US Embassy Report • A’s Gov improved security at Israel embassy; arrested demonstrators • In contrast, Gov allows demonstrations at Iranian embassy against treatment of Azeris in Iran • Access by A to quality weapon system that cannot obtain from US and Europe • Officially, A balances cordial relations with Israel with responsibilities into OIC (Organization of the Islamic Conference) • It does not maintain an embassy in Israel • It dutifully (though weakly) criticizes I’s operations against Palestinians

27. …US Embassy Report, conclusions • “Israel’s relations with Azerbaijan are based strongly on pragmatism and a keen appreciation of priorities. I’s main goal is to preserve A as an ally against Iran, a platform for reconnaissance of that country and as a market for military hardware”

28. Why does it matter? • According to several high-level sources inside the US Gov, the “submerged” aspect of the I-A relations (the security cooperation) is heightening the risks of an Israeli strike on Iran • US has concluded that I has been granted access to airbases close to Iran’s northern border • “The Israelis have bought an airfield, and the airfield is called Azerbaijan”

29. …why does it matter? • US concern: I’s military expansion into A complicates US efforts to dampen Israeli-Iranian relations • US military planners must now plan not only for a war scenario that includes the Persian Gulf, but one that could include the Caucasus

30. Latest developments • Feb. 2012: $1.6 billion arms agreement that provides A with sophisticated drones and missile-defense systems • Iran presented note to A claiming A supported Israeli-trained assassination squads targeting Iranian scientists • A member of A ruling party called on the gov to change the country’s name to “North A”, implicitly suggesting that the 16 million Azeris who live in Northern Iran (South A) are in need of liberation • Work in progress……..