While Russia had the original inner track to its Soviet-era Transneft pipeline monopoly, China has also struck a deal with Ashgabat to construct a pipeline, a development that seemed to leave European and American investors out in the cold. Recent diplomatic developments between Turkmenistan and Azerbaijan indicate, however, that a "Western" export option via a pipeline under the Caspian, Washington's favored option, may yet see the light of day.

Prior to the implosion of the Soviet Union in December 1991, the Caspian Sea was divided between Soviet and Iranian spheres of influence on the basis of 1921 and 1940 treaties. In the aftermath of the Soviet Union's disintegration, four new states emerged, sharing the Caspian with the Islamic Republic of Iran. After the breakup, Western companies saw an opportunity to become major players in developing the Caspian and were eagerly courted by Azerbaijan and more cautiously by Kazakhstan. But the collapse of the Soviet Union produced a major diplomatic conundrum -- how to divide the Caspian's offshore waters?

Almost immediately two opposing positions developed -- Russia favored a division based on shoreline length, while Iran, whose coastline under such an arrangement would have given it a 13 percent share, argued for an equitable 20 percent sharing of the offshore waters among the five riparian states. Azerbaijan and Kazakhstan eventually lined up behind Moscow's position, but Turkmenistan under the mercurial Niyazov equivocated, sometimes backing Tehran, sometimes supporting Moscow. The end result is that 17 years later the issue has yet to be resolved. What has occurred, however, is that all the nations concerned have quietly begun offshore developments near their shorelines in what would clearly be their national sectors whatever the eventual outcome. Now an Azeri-Turkmen rapprochement may break the diplomatic impasse.

On May 18 Berdymukhamedov made his first visit to Baku, the capital of Azerbaijan, and held talks with Azeri President Ilham Aliyev. The discussions were the first since 1996. In an indication of the sensitivity of the talks, only TV correspondents and correspondents of the Azerbaijani state news agency AzerTadzh received accreditation to cover the summit. Journalists speculated that the two leaders would consider the whole range of bilateral relations, including bilateral cooperation in the energy sector.

The meeting was not the first between the pair; the two presidents met for the first time on the sidelines of a Commonwealth of Independent States summit in St. Petersburg in June 2007. Earlier this year the bilateral Azeri-Turkmen economic cooperation commission resumed meetings, while last month Turkmenistan reopened its embassy in Azerbaijan, shuttered since 2001 over ongoing disputes about division of the Caspian's resources.

The rift was exacerbated by the fact that the previous Azeri president -- Ilham Aliyev's father, Heidar Aliyev, who died in 2003 -- intensely disliked Niyazov, who reciprocated the antipathy. Their antagonism focused on the disposition of the Caspian offshore Kapaz oil field, known as Serdar in Turkmenistan. The Kapaz formation, located nearly equidistant between the Azeri and Turkmen shores, contains an estimated 100 million to 150 million tons of oil reserves. Further aggravating bilateral relations was the fact that since the early 1990s, before Caspian development took off, Baku owed Ashgabat money for fuel. Azerbaijan recently paid its outstanding $44.8 million debt.

Currently Azeri-Turkmen relations are regulated by more than 30 documents, but these could be dwarfed if the summit talks achieve an agreement on a trans-Caspian gas pipeline, which is actively supported by both the United States and the European Union.

Such an undersea pipeline between the ports of Turkmenbashi and Baku, being clearly in the Azeri-Turkmen "national" waters, would have the advantage of not impinging upon Kazakh, Russian or Iranian sectors, simplifying issues of sovereignty for potential foreign investors. Foreign interest in the project is longstanding, as last year the U.S. State Department gave a grant for a feasibility study of the pipeline project, while in April EU Commissioner for External Relations Benita Ferrero-Waldner visited Ashgabat.

Optimism over a possible breakthrough is running high in Baku. While neither government issued specific details of the talks, the head of the International Relations Department of Azerbaijan President's Office, Novruz Mammadov, said, "Relations between Azerbaijan and Turkmenistan were raised to a higher level and further developed." The Azeri business community also senses opportunities. The president of Azerbaijan Export & Investment Promotion Foundation, Emil Majidov, whose institution up to now has operated only in Kazakhstan's Caspian Aktau port, is optimistic that it will soon open offices in Turkmenistan.

What is unclear at this stage, however, is the reaction of Russia and Iran to such a development. If such a project comes to fruition, Moscow stands to lose billions in transit revenues from its pipeline monopoly, while Iran, which has been upgrading its Caspian port facilities in the hope of diverting Caspian trade southward, would similarly see its hopes dashed. While the future is murky at best, both Baku and Ashgabat can certainly expect increasing diplomatic pressure from both Moscow and Tehran as they attempt to export their energy in an era of record-high energy prices.

(e-mail: energy@upi.com)

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