Western Oil Firms Sign Deal for Drilling in Caspian Sea

Despite Russian objections, a consortium of Western oil companies signed an agreement Tuesday with Azerbaijan to invest up to $8 billion to develop vast offshore oil deposits in the Caspian Sea.

The 30-year contract, signed in Baku by Los-Angeles based Unocal Corp., Amoco, British Petroleum and other U.S., Russian, Turkish and Norwegian oil companies, envisions that the first barrels of high-quality oil could begin flowing within 18 months.

That would be a huge boon to war-weary Azerbaijan, where the deal was being billed as “the contract of the century.”

But while dignitaries--including U.S. Deputy Energy Secretary William H. White and Azerbaijani President Heydar A. Aliyev--were signing the contract amid much fanfare, the Russian Foreign Ministry announced in Moscow that it was categorically opposed to the deal.

Russia has long opposed dividing up the Caspian Sea among the five nations that surround it. Citing the Soviet-Iranian treaty of 1940, Russia claims that no one country has the unilateral right to exploit Caspian reserves.

The oil fields covered under this deal are about 120 miles off Azerbaijan and are expected to yield up to 4 billion barrels of light, sweet crude. The Baku government, which began offshore drilling in the Caspian in 1901, insists the fields belong to Azerbaijan.

Some opposition leaders see Russia’s territorial claims as a thinly disguised bid to extract oil tribute from a former vassal.

Nevertheless, after Russia sent a formal note to the British Embassy this spring staking its claim to the reserves, Azerbaijan invited the Russian state-owned oil company Lukoil to take a 10% share in the project.

On Tuesday, Russian Foreign Ministry spokesman Grigory Karasin announced that Russian objections had not been satisfied. He said the oil exploration deal contradicts international law and poses an ecological threat to the Caspian.

“For this reason, Russia . . . formally, officially will not recognize the signed agreement, with all the ensuing consequences,” Karasin said.

He did not elaborate on what those consequences might be, and it was not immediately clear whether Russia can or will take concrete steps to block the impending oil bonanza.

But in a symbolic snub, Russian Energy Minister Yuri K. Shafranik did not show up at the signing ceremony as planned, though lower-ranking officials did attend, the Khabar News Service reported from Baku. Lukoil’s president was also absent, and the contract was signed by the company’s vice president.

The complex deal has taken three years to negotiate. Western companies have persisted despite a coup d’etat that ousted Azerbaijan’s first democratically elected president last year and despite years of fighting with the Armenian-populated enclave of Nagorno-Karabakh that ended in a cease-fire last summer.

Unocal spokesman Mike Thacher said the joint venture is the company’s first in the former Soviet Union. He noted that the draft contract must still be ratified by the Azerbaijani Parliament, as well as the boards of the consortium countries. But he said Unocal will proceed and hope the territorial claims are settled quickly.

Also still to be resolved is how to ship the oil out of the Caspian basin. A pipeline is desirable. But the question is what route to take out of the unstable region and who would finance construction.