The North Sea region went from being an area of gas exporters to importers and then back to being exporters. History may well repeat itself in the Black Sea region.
The Scottish chemist James Young began the commercial extraction of North Sea oil in 1851, squeezing it out from shale by heating it in a retort, rather than drilling from a well. A hundred or so small onshore commercial discoveries followed in Germany, England, and the Netherlands but they failed to match the insatiable appetite for oil and gas in the littoral countries.
A hundred years later, the North Sea was still a marine route for supplying oil to the littoral countries from distant producing fields, but not a producer itself. Until the late 1960’s, none of the neighboring countries reported significant petroleum (oil and gas) reserves.
In those days, Middle East oil traded at $1.80 per barrel, the U.S. was an oil exporting country, and natural gas pipelines were yet to expand across Europe. Well into the 1970’s, all of the countries bordering the North Sea were net oil and gas importers.
There were good reasons for that: even though indications were found as early as the mid-19th century that the North Sea could contain plenty of petroleum, there was no need to go after it – it was plentiful and cheap elsewhere. It took two oil price shocks and an OPEC oil embargo to really draw attention to the potential of the North Sea. Soon afterwards, the UK and Norway emerged as net exporters of oil and gas. Today, 50 years after the beginning of oil boom in the North Sea, it is a mature petroleum province with declining oil output, although the peak of gas production is yet to be reached. Over the course of half a century, the U.K. managed to go through two peaks of oil production before reaching its current state of decline, but Norway’s gas output is still growing.
Now, the Black Sea: shows of oil and gas have been observed on the shores of the Black Sea since antiquity, with the first commercial production beginning no later than 1857 in Romania – and possibly 1842 or earlier in Azerbaijan. Since then, Romania witnessed two peaks of oil production, one of gas, and is now a net importer of both. Azerbaijan saw two peaks of oil output and is now on a sprint to a third, much higher one. Ukraine, once a net gas exporter (yes – before its gas production peaked in the mid-1970’s) is now heavily dependent on imports from Russia. Other countries, believed to be poorly endowed with petroleum, also went through boom and bust cycles of their own – Georgia during the 1980’s, Bulgaria during the 1970’s, and Moldova as well – but production there was and remains marginal.
While all of the littoral countries around the Black Sea except, of course, Russia, are today net oil and gas importers, the case of Ukraine stands out. Its proven oil reserves are small, only 0.4 billion barrels at the end of 2007, smaller than those of Romania (0.5 billion barrels) and about the same as Turkey (0.3 billion barrels). However, Ukraine boasts about a trillion cubic meters of gas reserves, a resource base that would generally be adequate enough to make the country self-sufficient in natural gas, since the reserves are equivalent to some 15 years of consumption at current levels. However, Ukraine imports up to two-thirds of the consumable gas at prices that it can hardly afford.
Most of the Black Sea, both the shelf and the deeper areas, is believed to be prospective for oil and gas. Indeed, numerous discoveries have been made on the shelf of Ukraine (including the Sea of Azov), Romania, and Bulgaria. Until recently, however, exploration beyond the shelf on the continental slope and in the deep sea has been sporadic and inconclusive. Among the reasons for the general lack of interest are the fact that the littoral countries have traditionally been well supplied with reasonably priced oil and gas by major producers – Turkey from the Middle East and Russia. Romania has been a net oil exporter for more than 130 years. Also, the lack of technology in the littoral countries has limited the scope of exploration for oil and gas in the Black Sea. Yet another limitation has been – and in Ukraine, still is – the poor terms and conditions offered to private investors in the upstream petroleum industry.
But all this is passé: prices are up and domestic output is down in all littoral countries. Russia excluded, imports of oil and gas are rapidly rising in volume and value, to the extent that they cause considerable foreign trade deficits in some countries, for example Bulgaria. Previously inaccessible technology is now increasingly available. And – except for the Ukraine – all of the countries have improved the terms of access for investors in the petroleum industry in general, in offshore exploration, and in production business in particular.
On the new frontier of petroleum in the Black Sea, Turkey is leading by example. In April 2009, Turkey’s state-owned petroleum company, TPAO, and Brazil’s Petrobras signed an agreement for the exploration of oil in the Black Sea. A deep-water platform, the Leiv Eiriksson, traveled from Norway via the Bosporus and reached the site of the first well off Sinop in January. The platform will stay in the region for five years. A second drillship, the Deepwater Champion, is currently under construction at the Hyundai Heavy Industries shipyard in Ulsan, South Korea, and should be ready to drill its first well in the Turkish Black Sea in the first half of 2011. ExxonMobil Exploration and Production Turkey will use the new drillship for its deepwater exploration program in the Turkish sector of the Black Sea. TPAO estimates the oil reserves that could be discovered by the exploration program at 10 billion barrels or more, which may be sufficient to support all of Turkey’s oil demand.
Similar opportunities may exist offshore of Georgia, Ukraine, and Bulgaria. Similar to the North Sea of 50 years ago, the Black Sea may be on the verge of becoming a major oil and gas producing province. In the North Sea, the oil boom helped to develop industries and all other kinds of business in the littoral countries. It also brought them together by necessitating joint approaches to resource management, environment, trade, and efficient use of labor and other factors of production. However, the question still remains: will this history repeat itself in the Black Sea?
Boyko Nitzov is Director of Programs of the Dinu Patriciu Eurasia Center at the Atlantic Council.