The Caspian Sea legal regime, pipeline diplomacy, and the prospects for Iran's isolation from the oil and gas frenzy: reconciling Tehran's legal options with its geopolitical realities.

• Author: Sanei, Faraz

ABSTRACT

The signing of the "deal of the century" in Baku creating one of the first major Caspian energy consortiums between Azerbaijan and western oil companies signaled the beginning of a new era in world energy politics. The discovery of potentially huge oil and gas reserves in the newly-independent states of Azerbaijan, Kazakhstan, and Turkmenistan opened the door for western oil companies rushing to gain a competitive foothold in the new energy market. For Asia and the West this discovery provides a golden opportunity to ensure market stability through diversification of energy export routes. For the United States and its political allies, however, the Caspian region holds the key to the realization of a long-term strategic agenda. By establishing its presence in the region, Washington could: 1) weaken the influence of the Persian Gulf states and prevent the Organization of Petroleum Exporting Countries (OPEC) from monopolizing the production and distribution of world energy reserves; 2) create a controlled environment ensuring that the flow of petro-dollars will lead to political and economic reform in Central Asia and the Caucuses; and 3) undermine the historical dominance of the Russian Federation and the Islamic Republic of Iran not only in the Caspian Sea region but in Eurasia and Central Asia.

The political and economic changes brought about by the collapse of the Soviet Union and the reemergence of the Caspian region as a focal point of geopolitical importance have broad implications for the new government in Tehran. On the one hand Iran clearly finds itself in a tough and unfamiliar neighborhood. It seems to have lost the game of political and cultural influence over the newly-independent states to Turkey, which claims common ethnic and linguistic bonds with its Turkic brethren in the east. It has failed to play the religious card effectively--both Kazakhstan and Turkmenistan and even Shi'ite Azerbaijan have looked to secular Turkey as the model of governance and reform. On the economic front the discovery of vast reserves in the Caspian has done little to increase the prospects for Iran's share of the world hydrocarbon market--relatively small oil and gas capacity has been found in the deep waters off Iran's coastline. Finally, Washington has actively engaged in a political and economic campaign to isolate Iran by allying itself with Turkey and the newly-independent states and continues to discourage the establishment of economic relations with Tehran. In this regard the imposition of unilateral trade sanctions on Tehran, the most important of which seeks to disrupt the country's economy by discouraging foreign involvement in the development of its oil and gas sector, have far-reaching legal implications for Iran's involvement in the Caspian energy scene.

Iran's geopolitical situation, however, affords it the distinct advantage of being the only land-bridge route linking the Caspian Sea to the oil-rich Persian Gulf. The importance of this cannot be overemphasized because the key to unlocking the Caspian's wealth lies in finding sustainable export routes that will carry the land-locked states' oil and gas to the open seas. Iran represents one of the shortest and arguably the most efficient routes not only because of its location but because of its advanced transportation and infrastructural capacity. Therefore, Iran's ability to take advantage of its position in the region will largely determine whether it will be able to frustrate the ultimate policy agenda of Washington. More importantly, it will ensure Iran increased participation in the world's oil and gas market and allow it to use the Caspian Sea as a springboard to strengthen its own regional and international policy goals.

It is in this context that the legal implications of energy exploration, production, and transportation in the Caspian Sea will be discussed. This study will seek to address competing notions of a Caspian Sea legal regime as they relate to Iran's geopolitical interests. In this sense the study is not simply an analysis of the status of such ownership rights in the Caspian, a subject that has been enthusiastically addressed by several legal scholars. Rather, it is a multi-faceted approach to exploring Iran's legal options regarding the establishment of such a regime given Tehran's political and economic interests and advantages in the region.

The author's main argument is that although legal issues surrounding the "Great Game" in the Caspian often take a back seat to geopolitical diplomacy between the major participants, Tehran must effectively incorporate international legal arguments into a far-sighted diplomatic strategy aiming to develop and bolster its transportation and distribution role in the Caspian region. Until now Tehran's ineffective and misguided use of legal strategies has only weakened its bid to retain legitimacy in the region. This is so because Tehran has sought only to force a "legal veto" on any offshore development in the Caspian Sea that could potentially endanger its geopolitical interests in the region. Instead Tehran should employ a two-pronged legal strategy that aims to secure its traditional interests in the region while ensuring that any formation of a legal regime defining ownership rights in the Caspian will ultimately accommodate its competitive advantage in the transportation sector.

1. INTRODUCTION

   Until the last decade or so the issue of a Caspian Sea legal regime received little to no attention in the scholarship of the international legal community.(1) In fact the term "legal regime" was rarely ever used in reference to the world's largest inland body of water.(2) This seems rather odd given the historical and economic importance of the Caspian Sea to the two states that controlled its waters until the collapse of the Soviet Union in 1991.(3) A rough historical survey of the region in the last century or so, however, reveals that after the battle for empire in Central Asia between Great Britain and Russia was settled in favor of the former, the region slowly entered a period of relative isolation that was eventually capped off with the consolidation of the Soviet Union.(4) For more than fifty years the Caspian's remote and landlocked location ensured the Soviet Union's (and to a lesser extent Iran's) hegemony over the lake's resources and navigational systems.(5)

   All that has changed with the interplay of two significant events in the last decade: the collapse of the Soviet empire and the discovery of vast oil and gas deposits in the three new succession states bordering the Caspian Sea.(6) In 1991 Azerbaijan, Kazakhstan, and Turkmenistan entered the international community as fledgling states desperate for foreign capital and integration into the world economy after years of domination under a closed political and economic system.(7) Soon thereafter, the discovery of rich hydrocarbon deposits on their land and offshore territories provided them with a golden opportunity to secure desperately sought foreign financial assistance.(8) As for the traditional littoral powers of Russia and Persia,(9) it is perhaps an irony of history that they have largely been left out in the cold with respect to Caspian hydrocarbon wealth within their immediate shorelines.(10) They now find themselves locked in the middle of a schizophrenic policy aimed at courting the new states while simultaneously preventing those same states from taking any unilateral actions that would compromise their influence in the Caspian.(11) With the entry of foreign corporations backed by Western strategic and political interests,(12) Russia and Iran are struggling to adjust to the new regional circumstances, with command over regional policies the immediate goal and ultimate control over international oil and gas markets the long-term prize.(13)

   At the center of this diplomatic struggle for regional supremacy is the legal status of the Caspian Sea and its ramifications for the prospects of ownership and mining rights over the Sea's oil and gas resources.(14) If, however, the uncertain atmosphere regarding ownership rights defines the legal battleground upon which the littoral states have pursued their diplomacy, the practical problem of transporting the oil and gas to world markets presents the ultimate geopolitical challenge.(15) Here, the Russian Federation and the Islamic Republic of Iran retain a potentially significant measure of influence over the newly-independent states (NIS).(16) While Russia's vast territory stretches from the Sea of Okhotsk and the Bering Sea in the Pacific to the Black and Baltic Seas in the West and Iran occupies the largest coastline of any Persian Gulf state, the NIS are essentially landlocked and have no access to the open seas.(17) This is a significant competitive and market disadvantage for these cash-starved economies, and one that they and the West must overcome if the potentials of the Caspian are to be fully realized and diversification of energy sources ultimately achieved.(18) It is in this way that the battle lines over legal delimitation of the Caspian have been supplanted by the more immediate concern for sustainable export routes to lucrative energy markets.(19)

   Given the above background, the impetus for this study comes from the surprising realization that there is little in-depth legal analysis regarding the status of the Caspian in international scholarship.(20) Sound analysis regarding the important legal issues surrounding exploitation of Caspian resources has often been clouded by political posturing and questionable reasoning.(21) In this sense, analysis has often operated in a vacuum where legal stakes have been reduced to seemingly abstract debates about what legal models or regimes must govern relations between the littoral states in the Caspian region, or whether the Caspian should be characterized as a sea or a lake.(22) The opposite trend has also...