China Could Ultimately Displace Western Majors as Key Player in Caspian Oil Fields

Twenty-six years ago, on September 20, 1994, Azerbaijan signed an accord with a consortium of ten international oil companies to develop its fields on the Caspian Shelf, an event that both Baku and the West described as “the deal of the century.” The agreement linked Azerbaijan and the broader region to the West and, equally importantly, was viewed as a major step to delink Baku and other regional capitals from Moscow, which was not a participant in that arrangement. Since that time, the Russian government has sought to exploit both the difficulties the consortium has had and to circumvent it with its own investments in pipelines, rail lines as well as in the Russian sector of the Caspian itself (see EDM, October 6, 2004 and March 24, 2020).

Moscow has been only partially successful in this multifaceted initiative, and it now faces a challenge few in the Russian capital had anticipated. Falling oil prices and questions about the future of petroleum markets produced by the global COVID-19 pandemic have prompted some Western majors to consider selling their stakes in the 1994 deal—though, not to Russian companies but rather to China’s National Offshore Oil Corporation (CNOOC), India’s ONCG, and Indonesia’s Pertamina, all of whom have the cash to make such purchases and have expressed interest in doing so (Akcent.site, Trend, June 4). Chevron recently sold its share to the Hungarian MOL Group, and now there is talk that ExxonMobil may follow suit, opening the way for new participants in the Caspian fields, including the People’s Republic of China. No such deal has been announced to date, but even its possibility is already sending shockwaves through the region and in Moscow.

Commenting on that prospect to Trend journalist Leman Zeynalova, Ashley Sherman, an analyst at Wood Mackenzie, said that “a stake in the project for the development of the Azeri-Chirag-Gunashli (ACG) fields in the Azerbaijani sector of the Caspian can be crucial to fulfilling growth ambitions.” Indeed, a shift from Western majors to oil companies from China or elsewhere will change the situation both economically and politically. “These are tough times for merger and acquisition activity, and companies are focusing on asset sales because of low oil prices and unprecedented market uncertainty. There are not too many buyers at the moment, as the upstream sector focuses on preserving cash.” But among those reportedly showing an interest are oil companies from China, India and Indonesia. They have deep pockets and the ability to move quickly, if the opportunity should strike (Trend, June 4).

Asked by Trend’s Zeynalova whether ExxonMobil might sell its stake in the ACG fields, officials at the company say they are “testing market interest for its non-operated producing assets in Azerbaijan” in response to “interest expressed by third parties to acquire its assets.” “If other companies find more value in an asset,” the corporate officials said, “we will sell.” Because ExxonMobil’s share in the ACG consortium is relatively small, only 6.79 percent, compared to BP’s 30.37 percent and Azerbaijani SOCAR’s 25 percent, its sale to Chinese, Indian or Indonesian firms would initially have only a small impact, given that Beijing would then control only a tiny fraction of the 524,000 barrels of oil these fields are currently producing. But that fact ignores two key issues. On the one hand, the symbolism of a Chinese role in the Caspian is enormous in Moscow. And on the other hand, it is entirely possible that China could use it as a stepping stone to a larger position in the Caspian basin.

Moscow is already alarmed by China’s success in using railways to project influence and power in Central Asia and the Caucasus and also in neighboring Iran; and while it may be pleased to see Western majors exit and with them Western influence in the region, the Russian government will be anything but pleased by the entrance of China in their place, especially given its recent inability to keep Beijing out of other developments in the region (see EDM, May 5; 4pera.com, March 25).

In the short term, Moscow’s concerns will likely lead it to go slow on the final delimitation of the Caspian Sea bed—the August 2018 accord that delimited the surface area among the five littoral states specifically left out the question of the seabed, and negotiations on the latter have been in an on-again, off-again mode since that time. The absence of such an agreement will make outside companies less willing to take the risk. And they have already prompted Moscow to expand its own development of oil fields in the Caspian as a counterweight, even though proven reserves in the presumed Russian sector are far smaller than in Azerbaijan’s as well as those of other littoral states (Ndelo.ru, June 11).

Consequently, while some in the West will perceive the modest entry of Chinese, Indian and other outside players into the Caspian basin as a small move on the enormous geopolitical chessboard of Eurasia, the Kremlin will see it as a major shift in the balance of interests and influence there. With the West’s exit advantaging China over Russia, leaders in Moscow will undoubtedly view this situation along their country’s southern periphery as particularly unpalatable.