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Stockholm Arbitration Report (SAR)

 Preview Page SAR 2004 - 1

1. INTRODUCTION

A large portion of the oil and gas reserves in Central Asia is believed to lie under the Caspian Sea. The extent to which this belief is in fact true remains to be established. For a number of reasons, it is difficult to measure the true wealth of the Caspian Sea. On the one hand, it would seem that the littoral states typically have an interest in exaggerating the potential of the Caspian Sea, primarily with a view to maintaining its attractiveness to outside investment. On the other hand, foreign oil companies interested in the oil and gas resources in the Caspian Sea have a tendency to downplay the potential, presumably in the hope of being able to strike better deals.

Even though the Caspian oil reserves cannot match those of Saudi Arabia or other states in the Persian Gulf region, it is clear that Caspian oil has the potential of playing an important role for future worldwide oil supply and thus for oil prices. This is in short the explanation why the question of the ownership of the Caspian oil and gas resources, including the right to license and tax their development is being debated by the Caspian littoral states, i.e. Russia, Kazakhstan, Iran, Azerbaijan and Turkmenistan.

The legal status of the Caspian Sea became a potential issue as the result of the dissolution of the Soviet Union in 1991. Overnight the number of foreign states around the Caspian Sea rose from two – the Soviet Union and Iran – to five. The issue de facto came onto the international agenda in 1994 when the Russian Ministry of Foreign Affairs sent a note to the British Embassy in Moscow saying that the ownership of Caspian resources remained to be settled, a statement made in connection with an investment agreement signed by the Azeri government and a British Petroleum led consortium.