Iran is intent on staying competitive in the great game to dominate Caspian Basin energy exports. Tehran has announced that it will begin developing its Caspian oilfields within the next two years, despite the fact that the five states bordering the sea have yet to agree on a territorial treaty. In addition, the construction of a pipeline from Iran's Caspian port of Neka to Tehran will enhance the country's export ability.

The Chief of Iran's Caspian Oil Co., Mohammad Hossein Dana, announced June 25 that Iran will proceed with plans to extract oil from offshore fields, scrapping a policy of non-development that had been in place. Dana said that the new policy was necessary to reduce the chances of Iran losing potential investors and customers. He indicated that competition among the Caspian littoral states – Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan -- was the cause of Iran's shift. "The Caspian Oil Company will soon be taking measures to keep abreast with these states in the development of the Caspian's hydrocarbon wealth," Dana said.

Iran will develop resources only from its undisputed sectors of the Caspian Sea. The exact size of the Iranian oilfields, like those of other littoral states, is yet to be determined, although years of prospecting and development have prompted some officials to estimate that Iran's Caspian oil reserves stand at more than 10 billion barrels. However, Dana stressed that more extensive exploration will be required to precisely determine the volume of extractable oil.

Citing studies made by other Caspian states, Dana expressed hope that most of Iran's reserves would prove cost effective to extract. He said that no determination had been made by Iranian authorities on the amount of Caspian oil the country would extract from the seabed.

Efforts by the five Caspian littoral states to conclude a territorial delimitation treaty remain deadlocked. [For background see the Eurasia Insight archive]. Officially, Iran still insists on the equal division of sea – a formula that would leave each country with a 20-percent share. Azerbaijan, Kazakhstan and Russia favor a framework in which Iran would end up with approximately 13 percent of the Caspian. Turkmenistan has proven to be a wildcard in the Caspian talks so far.

The last round of Caspian talks, held in May in Kazakhstan, succeeded in narrowing differences on tangential issues, but made little headway on the territorial share question. [For background see the Eurasia Insight archive].

Partly because of their frustration over the lack of progress of talks, and partly because of their interest in developing certain offshore oilfields, Azerbaijan, Kazakhstan and Russia signed an agreement in May to divide the sea's northern section. Under that agreement, Kazakhstan will control a 29 percent share, while Azerbaijan and Russia each gained a roughly 19 percent share.

Iran's prickly relationship with Azerbaijan has complicated the Caspian negotiations. Both Iran and Turkmenistan are disputing Azerbaijan's possession of three offshore oilfields -- Azeri, Chiraq and Guneshli. Tehran and Baku are also wrestling over a yet-to-be developed oilfield, known as Alborz in Iran and Alov in Azerbaijan. An armed incident in 2001 raised the possibility that the Caspian Basin might be willing to fight for oil rights. [For background see the EurasiaNet archive].

Since 2001, bilateral tension has abated. Yet, officials in both countries readily admit that a territorial agreement remains elusive. [For additional information see the EurasiaNet archive].

Prospects for compromise have been dimmed by Azerbaijani President Heidar Aliyev's health woes and the uncertain leadership situation in Baku. [For additional information see the EurasiaNet archive].

Iran is proceeding not only with plans to extract its own Caspian resources, it is additionally seeking to boost oil swap deals with its neighbors. Under such swaps, Iran is trading its own Persian Gulf crude in return for Caspian oil from Russia and Central Asian nations. Iranian officials are soon expected to open the almost 200-mile (300-kilometer) Neka-Tehran pipeline, which could raise Iran's swap capacity three-fold to 150,000 barrels per day (bpd).

According to industry experts, Iran could ultimately boost capacity along the Neka-Tehran route to 350,000 bpd) by building additional pumping stations. Oil swaps between Iran and its Caspian neighbors, especially Russia and Kazakhstan, could top more than 100,000 bpd by the end of 2003, Iranian officials say. Such swaps are attractive to regional officials because of significant reductions in transport costs.

It is widely believed that the Baku-Tbilisi-Ceyhan pipeline currently under construction will capture a large share of Caspian Basin oil exports. Iran, however, is striving to position Neka-Tehran as an attractive alternate route. A major potential source of exports for Neka-Tehran is Kazakhstan's Kashagan field, which is expected to start pumping oil in 2007.