The Next Oil Frontier

How America's soldiers, oilmen, and diplomats are carving out a new sphere of influence on Russia's borders

It's Happy Hour at Fisherman's Wharf, an expatriate hangout in Baku, a port on the Caspian Sea in the former Soviet republic of Azerbaijan. The place is just around the corner from the town's only McDonald's, and on a Friday in April, a gaggle of Brits, Americans, and Aussies are gathered on bar stools to munch peanuts, quaff beer, and shoot the bull. Talking about Web access in this, an authoritarian Muslim country, one guy, looking as if he had just returned from a long stint on an offshore oil rig, says to his buddy: "Yeah, but can you get"

The all-male oil worker is a type Americans can readily identify. Most Americans, though, couldn't find Azerbaijan on the map. And they probably wouldn't be able to find--or spell--Kyrgyzstan, Uzbekistan, Kazakhstan, or Tajikistan. But American soldiers, oilmen, and diplomats are rapidly getting to know this remote corner of the world, the old underbelly of the Soviet Union and a region that's been almost untouched by Western armies since the time of Alexander the Great. The game the Americans are playing has some of the highest stakes going. What they are attempting is nothing less than the biggest carve-out of a new U.S. sphere of influence since the U.S. became engaged in the Mideast 50 years ago. The result could be a commitment of decades that exposes America to the threat of countless wars and dangers. But this huge venture--call it an Accidental Empire--could also stabilize the fault line between the West and the Muslim world and reap fabulous energy wealth for the companies rich enough and determined enough to get it.

The buildup of this commitment has been breathtakingly fast. Consider:

-- A year ago, not a single U.S. soldier was in the region. Today, roughly 4,000 servicemen and women are building bases, assisting the Afghan war, and training anti-insurgency troops along a rim of peril stretching 2,000 miles from Kyrgyzstan, on China's border, to Georgia, on the Black Sea. In early May, U.S. advisers started training antiguerrilla forces in the Pankisi Gorge in Georgia, where Muslim insurgents believed to be connected to al Qaeda are taking refuge from their struggle against Russian troops across the border in Chechnya. A few days before that, Defense Secretary Donald H. Rumsfeld declared on a visit to Kyrgyzstan, where the U.S. Air Force has a base, that coalition troops would stay there "as long as necessary."

-- From incidental sums fewer than five years ago, the amount of U.S. investment in the region has jumped to $20 billion. The biggest recipient: Kazakhstan, a vast state with huge oil reserves and a dictatorial ruler, ex-Communist boss Nursultan A. Nazarbayev.

-- The energy giants have revved up their commitment to the Caspian region, one of the last big undeveloped clusters of fields on the globe. Major investors include ChevronTexaco Corp. (CVX ), Exxon Mobil Corp. (XOM ), BP PLC (BP ), and Halliburton (HAL ) . BP alone, for example, plans to put up to $12 billion into the region over the next eight years.

-- U.S. government aid to the region, including programs to improve irrigation, battle drug traffickers, and train software programmers is on track to jump 50% from pre-September 11 levels, to $809 million a year.

Every day the Americans dig themselves in deeper into this part of the world, where 74 million people bring an exotic mix of Turkic, Mongol, Persian, and Slavic influence. What is fast evolving is a policy focused on guns and oil. The guns are to protect the local regimes from Islamic radicals and provide a staging area for attacks on Afghanistan. The goal is "to get rid of terrorism, not just get it out of Afghanistan," says A. Elizabeth Jones, Assistant Secretary of State for European and Eurasian Affairs. The guns, of course, will also protect the oil--oil that Washington hopes will lessen the West's dependence on the Persian Gulf and also lift the nations of the Caucasus and Central Asia out of their grinding poverty. "If you have prosperity, you have stability," Jones says.

Estimates of the Caspian oil pool vary greatly--from 200 billion barrels, on the level of a Saudi Arabia, to fewer than 100 billion barrels, still on a par with the reserves of the North Sea and at current oil prices worth $2.7 trillion. Besides, world oil prices are highly sensitive even to relatively small increments of additional production. The Caspian could have a huge impact on the ability of OPEC to influence the oil market, says a U.S. government energy analyst. By 2010, the Caspian could claim 3% of global oil output, according to Moscow brokerage Renaissance Capital.

Chevron was the pioneer: In 1993, it bought into the huge Tengiz field in Kazakhstan, with an estimated 6 billion to 9 billion barrels of reserves. In October, 2001, almost $4 billion in investment later, a Chevron-led consortium opened its 980-mile pipeline from Tengiz to the Russian port of Novorossisk on the Black Sea. BP's Caspian project is one of its biggest anywhere. ExxonMobil has also been spreading into the region, with stakes in the Tengiz field and in offshore Caspian deposits belonging to Kazakhstan and Azerbaijan. All three oil majors are hungry to get in on future finds. "I don't think ChevronTexaco's appetite for investment in this part of the world is satisfied yet," says Dennis Fahy, general manager of ChevronTexaco Corp. in Kazakhstan.

Key to the game are the pipelines, where diplomacy and oilcraft meet. The Caspian is a landlocked sea. Its vast oil output must be piped overland to the Black Sea, the Mediterranean, or the Persian Gulf before it can be pumped into tankers. The U.S. wants a pipeline that will help its friends in the region and freeze out its enemies--especially the Iranians, also located on the Caspian. That's why Washington is strongly discouraging plans by some oil majors to lay a pipeline across Iran, lobbying instead for a proposed $3 billion, 1,090-mile pipeline to carry up to 1 million barrels of oil a day from Baku through Georgia to the Mediterranean port of Ceyhan in NATO ally Turkey.

Nothing is easy in this part of the world, however. Georgia, run by former Soviet Foreign Minister Eduard Shevardnadze, has been wracked by civil war, organized crime, and terrorism. It's hardly a safe place for a pipeline. So the Pentagon is sending 150 military trainers to Georgia to help with anti-terrorism efforts and is helping Azerbaijan to bolster its Caspian Sea Navy and modernize an air base for potential use by U.S. forces. These represent "concrete steps" the U.S. will be taking to provide security for Caspian oil investments, says oil analyst Julia Nanay at Petroleum Finance Co. in Washington. BP, which is seeking to recruit other investors for the Baku-Ceyhan pipeline, is expected to make a final decision by June about going ahead. "Construction is going to be approved," says Richard Pegge, a senior manager in BP's Baku office.

Iran is not giving up--which means tensions may get worse in this already tense region. "Iran's strategy is to be the main transit route out of the Caspian," says Tehran oil consultant Bijan Khajehpour. The Iranians are still seeking investors for their pipeline--and acting tough to defend their oil stakes. Last summer, Iranian gunboats and a fighter jet chased a BP research vessel out of waters disputed by Iran and Azerbaijan. BP has not resumed exploration in that area.

The Iranian-U.S. face-off has inspired some tricky maneuvering by some of the local dictatorships. Kazakhstan, the region's biggest oil power, with an estimated 1.1 billion metric tons of oil reserves, is aiming for a southern pipeline route to the Persian Gulf to serve growing Asian markets, including China. "We consider the Iranian route to be the best one," says Kairgeldy Kabyldin, managing director of state-owned oil-and-gas company KazMunigas.

The White House still hopes to win over Kazakhstan, one of many repressive Central Asian and Caucasus regimes it is courting. But the U.S. is also cultivating activists, a move whose long-term benefits are unclear. This is a region where ethnic hatreds go back centuries and where locals who want to help fight terrorism may be dangerous fanatics in their own right--just like the U.S.-armed mujahideen who expelled the Soviets from Afghanistan and morphed into the Taliban. Just talk to Aki Eshqi. Dark eyes blazing, the 34-year-old sips espresso in a Baku café and warns of a growing underground of Iranian-linked militants in Azerbaijan. Eshqi, who works for a foundation to promote ethnic Azeri solidarity, is eager to operate as America's eyes and ears in Azerbaijan, pointing out Iranian infiltrators such as the Islamic group Hezbollah.

Why so gung ho? Because Eshqi is an Azeri nationalist who aims to make northern Iran--an ethnic Azeri territory--part of a greater Azerbaijan. Eshqi says Azeri-armed bands in northern Iran are prepared to fight for their cause. "They know it's not their time [for a shooting battle]," Eshqi says, but they are hoping the U.S. will help. The State Dept. has indeed met with representatives of ethnic Azeris in northern Iran.

Not everyone is putting out the welcome mat. Russian hard-liners see the southern-rim thrust as a strategy of U.S. encirclement. "Your foreign policy," a group of ex-military officers recently wrote President Vladimir V. Putin, is "the policy of licking the boots of the West."

Putin is trying to calm the hotheads. He may be calculating that his struggling country, barely able to supply its own armed forces, can benefit from the Pentagon's thrust. Putin and Bush plan to discuss U.S. military activities and intentions in the Caucasus and Central Asia at their upcoming summit on May 24 in Moscow.

There's certainly plenty to talk about. On a mid-April trip to the region, Defense Secretary Rumsfeld met with Nazarbayev to discuss Pentagon access to airfields in Kazakhstan. Some 1,000 troops of the U.S. Army's 10th Mountain Div. are already stationed at the ex-Soviet Khanabad Air Force Base in southern Uzbekistan. They arrived last October to launch operations against Afghanistan, 125 miles to the south. Now, local prostitutes dream of relieving American Rambos of their dollars--as do the owners of Las Vegas, a nightclub featuring a fluorescent mural of the Manhattan skyline. "They can have beer, vodka, whiskey, whatever they want," says bartender Jamshid Rakhimov, 20. Fascinated by the female soldiers at the base, Uzbek guards offer to sell snapshots of women G.I.'s riding motor scooters.

Russians are not the only ones nervous about U.S. troops in Central Asia. The State Dept.'s research shows that most people in Uzbekistan, Kazakhstan, and Kyrgyzstan oppose an extended U.S. military presence. "If the U.S. overstays its welcome in the region, it could alienate key allies in the war against terrorism," the department concluded in its Apr. 4 analysis.

That risk also exists in oil-rich, BP-dominated Azerbaijan. "Bush sees us as the 51st state," scoffs Teymur Mamedov, a 32-year-old logistics manager for a Western oil-services company in Baku. "But it doesn't work that way. There's nothing to hold us together--only money, and that's not enough."

Still, the Azeri government views the expanded U.S. security role in the country as an insurance policy against any future bid by Russia to reassert control. "Azerbaijan is trying first of all to become a player around the table, not to be the table for someone else to play cards on," says Deputy Foreign Minister Araz Azimov.

Then there's China. Moscow's influence in its old backyard of Central Asia may be waning, but Beijing's is rising. And the Chinese suspect that the Pentagon's real goal is not anti-terrorism but access to bases to keep an eye on, and if need be, contain China's activities in the region. "It's all part of the game big powers play," says Wang Yizhou of the Chinese Academy of Social Sciences in Beijing. Not to be outdone, the Chinese are giving the Kazakhs military wares, such as communications equipment.

The Chinese can play the power game, but in this chess match the U.S. has more pieces. Uzbek President Islam A. Karimov is grateful that the Pentagon-led campaign in Afghanistan dealt a blow to the local Islamic guerrilla group that fought alongside the Taliban. Now. he's opening up the country's state-owned gold mines to $100 million in investment from Denver's Newmont Mining Corp. (NEM ), the world's biggest gold miner. Since 1992, Newmont has operated a modest 50-50 joint venture with the state. Now it will do the mining itself at a new site in which it will hold a 60% interest. The goal is to produce 300,000 ounces a year. "This is a strategic investment that has the potential to become a large core asset," says Tim Acton, the company's manager for Central Asia and Russia.

But the southern rim of Russia remains one of the toughest places on earth to do business. American investors who have braved the the region have memorized the Foreign Corrupt Practices Act (FCPA)--the U.S. law defining the kinds of transactions that meet the test of an illegal bribe. Even savvy companies can be stymied. Bechtel National Inc. had hopes of building a $2.5 billion pipeline to ship gas from Turkmenistan across the Caspian Sea and into Turkey. But it pulled out of Turkmenistan in the fall of 2000 after it became clear that FCPA-permissible business was impossible with the regime, headed by a cult-of-personality dictator, President Saparmyrat A. Niyazov, known as the Turkmenbashi, who has turned the entire country into a showcase for his personal portrait. "They just wanted to be bought off, as quite often happens in this area, and we don't do that," says a senior Bechtel official.

The expats who tough it out have an adage: Business may be difficult, but life is good. In Baku, top Western executives live in Wellington Heights, a luxury high-rise with a spectacular view of the harbor and the city's most famous sight, the centuries-old Maiden's Tower. Even though most city residents lack properly filtered water in their kitchens, Western managers, accountants, bankers, and lawyers tied to the oil business are spending millions of dollars renovating 19th century townhouses with wrought-iron balconies as finely crafted as those in Paris. Most of the expat executives are middle-aged men, and with their fat wallets--let's face it, it's not their bulging waistlines--they are magnets for beautiful young local women. "Certainly, sexual harassment rules don't apply here," says one American male fortysomething businessman, recounting the perks of life in Baku.

Sensitive to the imperialism rap, the Bush Administration says its goal in the southern rim is not to exploit but to nurture prosperous, democratic societies--societies in which locals won't choose to join terrorist groups. This is why the U.S. in mid-March inked an agreement with Uzbekistan. America pledged to protect the country from external threats in return for its pledge to liberalize its Soviet-style economy, improve its human-rights record, and ease government-imposed press censorship. There's room for progress: Uzbek police, including Karimov's own national security service, "used suffocation, electric shock, rape, and other sexual abuse" to obtain confessions from detainees in 2001, according to the State Dept.'s most recent report on human-rights practices in the country. Opposition figures worry Karimov will play the U.S. need for military bases against any American attempt to stay his hand.

In southern Azerbaijan, amid lemon trees, lazy rivers, and cows that meander across roads, the State Dept. is funding a human-rights center in the town of Lenkoran, 25 miles from Iran. Religious observance is much stricter here than in Baku. It's not hard to see where local sympathies lie. "America has established a bad policy regarding Iran," says Hamdulla Aliyev, a mullah. Inside the center, local Azeri leaders offer seminars on elections and hand out literature on the rights citizens can demand if interrogated by the police. Still, even among center leaders, there's skepticism about America's purposes. "If there was no oil in Azerbaijan, I am sure America would not help us," says one of the staffers.

America's best hope for engendering good will may be to solve the still-simmering regional conflicts that killed some 100,000 people during the past decade. White House officials, for example, are worried that the Azeri army may get enough of a boost from U.S. weaponry to try something foolish--such as attacking Armenian troops still occupying a part of Azeri soil after a bitter war sputtered out in 1994. Prodded by the U.S., Aliyev and Armenian President Robert Kocharian are planning to meet in Prague in late May. "We have every reason to push" for a peace deal, says John M. Ordway, U.S. ambassador to Armenia.

The Kremlin is willing to help but isn't optimistic. "It was Russia's mission for so long to protect Western civilization from the Asians," says Vyacheslav A. Nikonov of the Polity Foundation, a Moscow political think tank. "If Americans are going to take over this job, God bless them."

Such sentiments aren't souring the can-do spirit of many Americans. James C. Cornell, president of RWE Nukem Inc. in Danbury, Conn., plans to double its uranium production in Uzbekistan. "When the U.S. is engaged militarily, it creates an umbrella for so many activities--not just business, but also education, culture," he says. "All things become possible." Trouble is, quagmires become possible, too.

By Paul Starobin, with Catherine Belton in Moscow, Stan Crock in Washington, Dexter Roberts in Beijing, and Haleh Anvari in Tehran

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