LONDON (Reuters)–Oil from the Caspian Sea–touted as the world’s most important new source of energy–could prove expensive and in short supply–the International Institute for Strategic Studies said on Thursday. The United States–Russia and China have long wrangled over proposed pipelines to deliver the oil–while the five states surrounding the Caspian have yet to agree on the division of the spoils.
But the Caspian’s potential has been overestimated because of both inflated estimates of oil reserves–and the prospect of continued low oil prices could make development of the fields and pipelines unprofitable–the respected think-tank said.
"Caspian energy is much less important than many political analyses have implied," the IISS said.
It said the US Department of Energy’s estimate of potential recoverable reserves at around 200 billion barrels was "widely derided" within the oil industry. The consensus of industry forecasts was between 25 billion and 35 billion barrels–including discoveries not yet made.
That makes the Caspian at most another North Sea–and not another Saudi Arabia–IISS director John Chipman told a news conference to present the institute’s annual "Strategic Survey."
"Given this size–the possibility of the Caspian serving as a major long term competitor and substitute for the Gulf evaporates," it said. "Instead of the 16 percent of world reserves the US State Department implies–the true figure for the Caspian is likely to be closer to three percent."
The IISS said the Caspian’s economic viability was questionable if oil prices stay at the bottom end of the $12 to $25 range seen since the Gulf Crisis of 1990 to 1991.
"Caspian oil is extremely costly–with the price driven up by the difficulties of moving equipment into the area–the expense of pipeline construction–and–most significantly–by the transit fees payable to other countries on potential pipeline routes."
World oil prices slumped to a nine-year low under $12 a barrel for Brent in March–weighed down by oversupply and a slowdown in demand due to Asia’s currency crisis.
"Any sustained period of low prices would cause interest in the region to wane and development timetables to slow," the IISS said–adding that so far this year returns on current or proposed projects in the Caspian were derisory.
The Caspian’s importance lies in the clash in positions between Russia and the United States–with the latter keen to head off excessive Russian or Iranian influence over another major energy source.
One pipeline route through Russia is already underway–while the route of a second is undecided and hotly contested.
The United States champions a western corridor leading to Ceyhan in Turkey–while the main competing proposal would carry Caspian oil south through Iran.
Meanwhile China would like to see an eastern route to northwest China in order to guarantee its energy supplies.
But according to the IISS–developers would be better advised to turn their attention elsewhere–to Iraq.
It would be better in economic terms to remove the barriers blocking development of Iraq’s reserves–given that it has far more oil–and moreover it could be produced and transported more cheaply–the IISS said.
"Given the number of major deals signed already in Iraq–and the avalanche of deals to be expected should international politics allow them to occur more openly–accelerated Iraqi development would make the Caspian rapidly appear to be a backwater of the international energy industry," it said.
Caspian oil would take considerably longer to develop–the IISS added.
Years of bitter dispute between the five states bordering the land-locked Caspian Sea–Azerbaijan–Iran–Kazakhstan–Russia–Turkmen’stan–have held up development in the region–though analysts say diplomatic activity that could lead to a resolution is picking up.
But the IISS concluded the major threats to Caspian energy development came more from economics than from politics–and Chipman’said the idea of potential military conflict over the region was misplaced.
"If the price of oil remains low for any prolonged period the viability of the oil and gas fields will become questionable," it said.