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Over growing protests from Iran, Russia has decided to draw a fine line in the Caspian Sea to enable oil companies to drill, but avoid the legal problems of setting up national sectors in the sea. The Russian strategy is also to settle the status of the northern Caspian oilfields without antagonizing Iran, by pressuring for a similar deal in the southern sector of the sea.

President Vladimir Putin and Kazak President Nursultan Nazarbayev signed an agreement that “solves the problem of the seabed oil deposits that were subject to disputes,” according to Andrei Urnov.

Urnov, who heads the Caspian Working Group at the Foreign Affairs Ministry in Moscow, said the newly signed protocol divides not the Caspian sea, but the natural resources of the seabed. “By signing the bilateral protocol, we try to solve the dispute, unfreeze the development of the deposits in the Northern Caspian and calm down and reassure investors. Before the protocol was signed, the deposits located in the north of the Caspian Sea were not properly assigned to either Russia and Kazakstan,” he explained.

Iranian officials reacted swiftly, officially informing Russia’s ambassador in Tehran that the document is “legally invalid” and “unacceptable.”

Industry sources say Putin has see-sawed between trying to accommodate Iran’s demand for a consensus from all Caspian states before seabed exploitation can begin, a position originally favored by the Russian Foreign Ministry, and giving Russian oil companies the green light to start drilling.

According to Urnov, the agreement between Russia and Kazakstan draws a line that “takes into account the historical investments made by the two sides in the development of the three existing geological structures [oil deposits] in this part of the Caspian.”

LUKoil, Russia’s oil giant, claims to have invested about $800 million in Kazakstan and the offshore Caspian fields since 1996. It estimates it is currently producing about 1 million tons of crude annually from Kazak territory, with a target of boosting this to 4 million tons. LUKoil officials said they hope to get “partial compensation for the expenses of exploration so far.”

Currently, Hvalynskoye is the only structure in the Northern Caspian with proven resources of oil. “We regret that we have to give away part of the deposit, but we are certain that we will find a compromise with the Kazakh side,” they explained.

They estimate that exploration of Kurmangazy, a deposit allocated to Kazakstan in the new agreement, will take five years and $500 million in new investment. Russian interests have been allocated a 25 percent stake in the new project, while the Kazakh share has been fixed at up to 50 percent.

Responding to Iran’s criticism, Urnov said dividing up rights to seabed oil projects “doesn’t violate the Soviet-Iranian agreements [which did not regulate seabed use]. Russia and Kazakstan do not try to divide what doesn’t belong to them.”

Urnov said that Russian negotiators will try to reach a similar agreement with Azerbaijan in talks next month. “At this point,” he cautioned, “it is not yet clear whether it will be possible to sign an agreement similar to that with Kazakhstan at once. Azerbaijan will have to come to an agreement on division of the resources of the seabed with Iran and Turkmenistan.”

According to Urnov, Russia and Azerbaijan may settle on an agreement in principle, but leave until later the problem of drawing the lines necessary to allocate development rights to seabed oil. This will not reassure the Iranians, who have warned Azerbaijan they are ready to use their naval forces to prevent exploration of the Caspian territory that remains to be demarcated. Putin has also ordered the buildup and exercise of Russian military forces in the northern Caspian.

Russian officials strain credibility when they claim the deal in the northern sector of the Caspian does not mean the Kremlin will acquiesce in Azerbaijan’s claims on southern territory claimed by Iran or Turkmenistan. Indeed, by putting pressure on the southern Caspian states, the new Russian tactic may provoke more, not less, use of naval force.

“Bilateral agreements,” Urnov said, “decrease the pressure in the region, and provide at least partial legal ground for reaching consensus on the status of the Caspian Sea and the division of the resources. There is still no full agreement with Iran on the principles of division of the seabed. But [Azeri President Gaidar] Aliyev will go to Iran in July, and hopefully, there will be some positive results of this visit.”

At their meeting in Moscow several weeks ago, Putin and Aliyev agreed to modify the median line of demarcation of the Caspian Sea frontier, a move Baku has been insisting on.

The ambiguous statement by Aliyev was the first signal that Azerbaijan, which has laid claim to more than 20 percent of the Caspian seabed, might be willing to compromise with both Russia and Iran. However, a meeting of presidents of all five Caspian states in Turkmenistan in April failed to indicate any progress between Azerbaijan, Iran and Turkmenistan.

Russian policymakers have been divided over how to deal with this conflict, with the Foreign and Defense Ministries leaning more towards accommodating Iran. The special presidential negotiator Victor Kalyuzhny, a former oil minister and advocate of the domestic oil industry, has been openly hostile towards Iran, while LUKoil’s chief executive Vagit Alekperov, a Baku native, is considered by the Kremlin to be too close to Aliyev.

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