It may not be a replay of Central Asia's 19th century "Great Game." But billions are at stake in the struggle among oil companies and governments to control the flow of oil from the Caspian Sea to world markets

By BRUCE NELAN

or a third time, the ancient city of Baku is a boomtown. Pressed against the western edge of the Caspian Sea, it is the epicenter of the last great oil rush of this century. Three hundred years ago, when Baku was part of the Persian Empire, the flammable stuff that bubbled up through its dry soil was sold in leather pouches carried on camels far and wide through the Caucasus. At the turn of the last century, under the Czars, the wells around Baku pumped out about half the world's oil supply. Now, in the capital of newly independent Azerbaijan, and across the Caspian in Kazakhstan and Turkmenistan, the world's biggest oil companies are engaged in a search for an oil and gas El Dorado.

The city's sandy shoreline, hemmed by a tree-shaded boardwalk, is gray with oil and the air is heavy with the dizzying stench of crude. New bars, cafes and night clubs open every week, and newly minted petro-barons fill the evenings with the honk and hum of their armored Mercedes-Benz. The hotels are jammed with deal-makers, production experts, spies and con men, Russians, Texans, Turks, Iranians. "Stay in town long enough," says Valeh Aleskerov, a senior executive of the state oil company, "and you'll meet every major oil player in the world."

They are all drawn by dreams of a huge mine of liquid gold. From 50 billion to 200 billion bbl.--the top guess would equal some 10% of the earth's potential oil reserves--are thought to lie under and around the sea. Even at today's depressed prices for crude oil that could add up to $4 trillion. But it is in a rough part of the world, studded with rugged mountains, Chechen guerrillas, border disputes, crowded sea-lanes and unstable and corrupt governments. Bringing the oil to the surface might turn out to be the easy part. Delivering it to the world will carry a huge price tag and enormous risks. It will also require changes in power relationships that stretch back for centuries.

The world's energy companies began scrambling for the prize as soon as the Soviet Union broke up. The biggest oil firms from the U.S., Europe, Russia, Japan, China and South America have bought into the action, forming alliances with local companies to gain access to the region and with each other to share the huge start-up costs. Some of their wells are already pumping, and in a few years significant supplies of oil could flow out of the Caspian reserves. But how will it travel to consumers? Who will control the spigots as it flows to market? At the crowded bar of the Ragin' Cajun, a nightspot in Baku, a veteran of oil fields from Texas to Siberia explains: "The game is called pipeline poker. That's what all the big boys are down here playing. I've been everywhere, but this is different. The Caspian is crazy. It's landlocked. We can drill all the oil you'd ever need. But can we get it out?"

That question has ignited a tense struggle in the region and beyond. When the coastal states of Azerbaijan, Kazakhstan and Turkmenistan gained their independence from the U.S.S.R. in 1991, they began taking stock of their buried treasure:

--AZERBAIJAN'S oil fields under the Caspian east and southeast from Baku may contain more than 30 billion bbl.

--KAZAKHSTAN has 22 major fields holding as much as 95 billion bbl. along the northeast Caspian coast and in the center of the country. Chevron and Mobil are helping develop the vast Tengiz oil field in northwestern Kazakhstan, which will pump 700,000 bbl. per day at its peak.

--TURKMENISTAN may be sitting on as much as 33 billion bbl. of oil, but now produces mainly natural gas from fields inland and along the coast.

All three of the new countries want to exploit their riches without interference, but Russia and Iran, the other two countries that rim the Caspian, have other ideas. As major oil and gas producers themselves--and as long-time hegemons of Central Asia--they are not overjoyed at their neighbors' good fortune.

American officials frown when the emerging struggle over the Caspian is described as another "Great Game," the term Rudyard Kipling applied to the 19th century battle for influence and control between the British and Russian Empires. For the most part, they are right. "The Great Game of the 19th century took place in an age of empire," says Michael Mandelbaum of the Johns Hopkins School of Advanced International Studies in Washington. "It was a contest for direct control of territory and its inhabitants." That's certainly not the case today, when "The participants are teams of executives, geologists, engineers and bankers."

Russia, strapped for cash and distracted by internal problems, has lost influence over the southern realms it ruled for so long. Most Russians don't care, but some influential officials and academics do. A group of foreign policy specialists declared in a recent manifesto that Russia must not stand by as the energy resources of the Caspian are carved up in the interests of the U.S. and Europe and warned that "the West wants to relegate us to the sidelines of history."

So, the Great Game continues but by other means. "People focused on the past worry about security arrangements in Eastern Europe," says Michael McFaul, a political scientist at the Carnegie Endowment for International Peace Center in Moscow. "Those looking to the future worry about pipelines, property rights and politics in the Caspian region." Russia and Iran want control, or at least a share, in the development of the oil fields, and they want any new pipelines to pass through their territory.

The Clinton administration wants Caspian oil to flow through many pipelines so that no single player can bottle it up the way Gazprom, Russia's natural gas monopoly, has kept gas from Turkmenistan from being exported through its huge network of pipes to Western markets. But the U.S. has opposed any new lines that pass through Iran. Last week, however, President Bill Clinton said that Iran was "changing in a positive way" under President Mohammed Khatami and that the U.S. was seeking "a genuine reconciliation" with Tehran. Most of Europe and some of the oil companies already believe that business is business, even with Iran. Said one Western oilman, "Who's going to blow up their own pipeline?" The U.S. will not protest if some new pipelines run through Russia, as the old ones already do, so long as the Russians will not be able to turn a valve and shut off all or most of the Caspian gusher. "There's plenty of the stuff to go around," says a senior Western diplomat in Baku.

Azerbaijan has signed production-sharing agreements with 10 consortiums. The first, and still the biggest player in town, is the Azerbaijan International Operating Co. (A.I.O.C.), consisting of 12 shareholder companies led by British Petroleum and Amoco. Its Baku headquarters in Villa Petrolea, on seaside Oilman Street, boasts one of the best views of the Caspian in the city. Its chief operating officer, Robert Erickson, is properly ebullient. "We've got three wells producing," he says, "and they're doing much, much better than we had predicted." This early production, some 40,000 bbl. a day from the three wells, travels through a 60-cm-diameter pipeline which heads north through Azerbaijan and then west to the Russian port of Novorossisk on the Black Sea.

But production will quickly outstrip the capacity of that line and the others already laid. By 2007, the A.I.O.C. expects to have more than 200 wells in operation pumping 800,000 bbl. per day, which compares with the 7 million bbl. per day shipped by Saudi Arabia. It and the other consortiums want a new "main export pipeline," a 107-cm-wide conduit that five years from now will be able to carry up to 1 million bbl. a day. The Russians like things the way they are. Right now the production cost for oil from western Siberia is roughly double or even triple that of pumping crude out of Tengiz in Kazakhstan or an Azerbaijani field. If the Caspian fields can send their oil to Europe through an efficient outlet, they could cut deeply into the profits from Siberia.

So the Russians try to obstruct progress. The Soviet Union and Iran signed treaties in 1921 and 1940 that declared the Caspian a common inland lake, not a sea. Even though the deal did not cover mineral resources, Russia still takes the position that the so-called sea is a lake over which it has rights. Last year, Moscow suggested that all the littoral nations be allowed to develop offshore projects inside a 72-km national zone. Then in a late March meeting in Baku with Azerbaijan's President Heydar Aliyev, Russian First Deputy Foreign Minister Boris Pastukhov proposed dividing the Caspian seabed among the states while leaving the surface and waters of the sea open for shared use.

Traditionally, Russians have backed their diplomacy with a show of military force and they continue to do so, reinforcing their claim to open water in the Caspian with naval forces. All told they can muster 90 naval craft including patrol, missile, and gun boats, minesweepers and hovercraft that can skim ashore carrying assault troops. The only area off limits so far has been the south end of the Caspian, where the Iranian navy has about 60 patrol and missile boats on duty and hints it might use them. Like Moscow, Tehran clings to the treaties of 1921 and 1940 and insists the Caspian is a lake in which it has residual rights. It takes a dim view of the development contracts the new states have signed and resents the American campaign to limit Iran's role in the Caspian's rich oil future.

"This is all ridiculous," says Hossein Kazempour Ardebili, an adviser to the Ministers of Petroleum and Foreign Affairs in Tehran, as he draws a map of proposed pipeline routes through Russia and Turkey. "Iran is the easiest, cheapest and safest way to export this oil and gas. We have our hands in the Caspian Sea and our feet in the Persian Gulf, the simplest outlet for this energy." Tehran insists that any new agreement covering the Caspian and its seabed must be based on unanimity of the five countries bordering the sea, giving Iran veto power over any plans it considers threatening to its own interests.

If the other regional states persist, Ardebili says Iran's claims could be advanced by drilling for oil offshore from other states. Tehran is also pondering ways to disrupt U.S. plans to bypass Iran. One is to offer the new neighbors a better price for their oil than they could get if they exported it to Europe through expensive pipelines. Finally, says Ardebili, "I want to reconfirm that destructive measures are options available to all parties." He warns, "We cannot accept America depriving Iran of its national rights."

The U.S., however, did not get involved in the Caspian oil rush because of a geopolitical urge to punish Iran. In fact, it took little notice of the region until 1995 when some of Washington's top power brokers went to work for Caspian governments or American companies, selling, lobbying or opening doors. Among them were former Defense Secretary Dick Cheney, former Treasury Secretary Lloyd Bentsen, and John Sununu, who was George Bush's chief of staff. Perhaps the most active Washington dignitary is former National Security Adviser Zbigniew Brzezinski, now a consultant for Amoco. He has long been a mentor to Secretary of State Madeleine Albright, and he has warned for years that the U.S. was making a strategic mistake in paying so little attention to the new Central Asian nations.

Washington is paying attention now, pushing hard for a main export pipeline that would run from Kazakhstan and Turkmenistan, underwater across the Caspian seabed to Baku, from there into Georgia and then southwest to the Turkish port of Ceyhan on the Mediterranean, avoiding Russia and Iran. Turkey, a NATO ally that would benefit from the transit revenues, has argued that the line would run through oil-consuming, rather than oil-producing, countries and would thus be less subject to conflicts of interest.

But there are other options. The states of the Caucasus are strung with old Soviet pipelines. The most important one, called the northern route, carries 100,000 bbl. a day from Baku north to Dagestan and then west to Chechnya and on to the Russian Black Sea port of Novorossisk. The potentially troublesome Chechens had been pacified with tariff payments for the pipe that runs through their troubled territory. But last week, in a reminder of just how tenuous such links can be, Shamil Basayev, Chechnya's acting Prime Minister, threatened to shut it down because the Russians are behind in payments.

The big Azerbaijan consortium is also modernizing a network of old pipelines and railways from Baku to Tbilisi and on to the Georgian port of Supsa on the Black Sea coast. But the potential for unrest is ripe in Georgia as well. Many Georgians believe "certain circles" in Russia are trying to subvert this effort and are responsible for two recent assassination attempts against President Eduard Shevardnadze. "In some Russian circles," Shevardnadze said in Moscow last April, "people are suffering over this pipeline. They claim that if the [main export] pipeline is built through Georgia, Russians are going to start starving. I don't think Russia is going to starve." The "western route" to Supsa, when it is fully refurbished later this year, is to carry 100,000 bbl. a day.

And still the oilmen need more capacity. They are looking at competing plans and ideas about where and how to build the main export pipeline. Some oil executives think the Supsa outlet will continue to be the most economical option. But Turkey opposes expansion of that route at least in part for environmental reasons. Tanker traffic from the Black Sea through the bottleneck of the Bosporus is already at a dangerously high level, carrying 40 million tons of oil annually--an ecological disaster waiting to happen as the 31- km-long Bosporus is only 800 m to 4,400 m wide and has 12 sharp turns that tankers must navigate. Of course, Turkey would also reap more economic benefits from the proposed link to Ceyhan.

The remaining routes have their own problems:

--Tehran wants to bring Caspian oil through its existing pipelines to the Persian Gulf. Most of the consortiums are not advocating this in public but recently they have been talking a lot more about swaps in which oil would be sent from Azerbaijan to Iran for domestic consumption in the north in exchange for a like amount of oil pumped out of Iran's terminal in the gulf. It would not only be economical, but it might buy off the otherwise hostile Iranians. "A 250,000-bbl.-a-day swap with Iran wouldn't kill the consortium," says one Western energy analyst in Moscow. The hitch is that the current U.S. sanctions on Iran would prevent American companies from taking part.

--In addition to the main export line in the south, the Caspian Pipeline Consortium, a partner in the development of the Tengiz field in Kazakhstan, hopes to build its own major line to Novorossisk on the Black Sea. The proposed C.P.C. pipeline would run almost 1,700 km from Kazakhstan, along the northern edge of the Caspian and west through southern Russia. It would cost some $2.5 billion and require a new export terminal a few miles north of the existing one at Novorossisk. The project is so big that it is still mostly a hope, and has no financing.

The U.S. began a global diplomatic effort for the Turkish option last fall, but it was not an easy sell. Building the 2,170-km network of oil and gas lines under the Caspian and down to the Mediterranean would cost about $4 billion and add up to $4 to the cost of each barrel of oil carried. To many executives, it looked as if it would be easier and cheaper to use the southern route through Iran or even the northern route through Russia to the Black Sea. The U.S. government began pressuring the oil companies to back the east-west route.

Then the quiet political support that had been in the background turned into a bandwagon as most of the key regional leaders came out publicly for the east-west line. Foreign Ministers of Azerbaijan, Georgia, Kazakhstan, Turkey and Turkmenistan met in Istanbul in March and agreed that the pipeline to Ceyhan would meet the needs of producers and consumers alike. After visits to Washington, Azerbaijan's President Aliyev and Turkmenistan's Saparmurat Niyazov formally signed on to the plan. During talks in Baku, Kazakhstan and Turkmenistan supported U.S. proposals for an undersea line that would link with the Baku-Ceyhan system.

Meanwhile, a breakthrough came at "the great pipeline shootout" this spring at a luxury hotel in Almaty, Kazakhstan. More than 200 executives, experts and advisers gathered to present and compare their pet plans. To everyone's surprise, Total, the French oil giant, put forward revised numbers that indicated its preferred option, a north-south pipeline through Iran to the gulf would in fact cost about $4 billion and would not be operational until 2004. This meant the line through Iran would cost as much and take at least as long to build as the east-west system that would run through Turkey.

Total is still pushing for the Iran route, but its appeal had mainly rested on its presumably lower costs. Despite the focus on strategic thinking, the final pipeline decision depends heavily on costs. The more the consortiums have to pay to transport the oil, the less they and the host countries make in profit. As it is, it will be many years before the A.I.O.C. will be in the black. The consortium seems all but certain to opt for the proposed line to run under the Caspian and through Turkey, and whatever route they select will probably determine what the other operators will do. If that is the way the whole new system goes, says Vafa Goulizadze, Aliyev's foreign policy adviser, "it would redefine the region and carry oil for decades and decades." And it would guarantee that Baku's third boom will be the biggest of them all.

--Reported by Scott Macleod /Tehran, Andrew Meier /Baku, Paul Quinn-Judge and Yuri Zarakhovich /Moscow And Douglas Waller /Washington