Lake or sea? A tricky question for the Caspian

Is the Caspian a sea or a lake? Maybe a rather metaphysical question for the business section but the answer could have profound results for the central Asian energy industry, which holds perhaps the largest amount of under-exploited oil and gas reserves on earth.

A conference in Baku, the capital of Azerbaijan, last week failed to agree on the answer. The presidents of the five states that share the Caspian's shores - the host along with Russia, Iran, Turkmenistan and Kazakhstan - just could not decide.

You can understand their dilemma. It has been called a sea since time immemorial, mainly because of its sheer size. The Caspian is far bigger than many other stretches of water that are indisputably called "seas", such as the North Sea or the Baltic Sea.

If you've had the pleasure of swimming in it, as I have, it certainly feels like a sea. It is salty and has big waves. Stretches of the Absheron peninsula, on which Baku stands, are developed as areas you could only call seaside resorts.

On the other hand, the Caspian also has the defining characteristics of a lake: it is land-locked and has no outflowing rivers. It is the largest enclosed body of water on the planet. In the north, where the mighty river Volga washes into it, it is virtually fresh water (salinity increases the further south you go).

The Caspian has one other feature that makes it very unusual indeed. Underneath it, or within easy reach of its shores, are locked some 79 billion barrels of oil and 7 trillion cubic metres of natural gas. Now you begin to understand why the five countries with Caspian shorelines are so interested in its status.

If they had decided the Caspian was lake, they would have had to carve up its resources and the revenue they produce equally, each getting one fifth of its bounty. Azerbaijan and Kazakhstan are especially concerned this should not happen: they have substantially more than that in the current de facto arrangement.

If the presidents had decided it was a sea, they could each have laid claim to areas according to the length of their coastlines. In particular, this would not have suited Iran: with only 13 per cent of the total Caspian shoreline, and the least promising so far in terms of proven hydrocarbon resources, it would have lost out to its neighbours with longer coastlines.

The status only emerged as an issue in 1991 and the collapse of communism. Until then, when Azerbaijan, Kazakhstan and Turkmenistan emerged as sovereign states, the Caspian was virtually a Soviet lake.

The first Caspian summit took place in 2002, when the extent of the energy reserves was becoming apparent, but the meeting in Baku was the latest to fail to come to an agreement.

The five countries seem to recognise that some degree of co-operation is required to maximise the potential of the region and that any conclusive ruling would upset the status quo. So they have muddled along, so far.

But two developments at the Baku conference showed the growing geopolitical and industrial importance of the Caspian. The first was a deal on naval security in the Caspian that would give greater powers to Russia and Iran - the only countries with any established naval presence in the area.

The others are not really in a position to argue with that and seem content to leave the question of security to the big two powers.

There are, however, possible negative consequences. Azerbaijan and Iran have in the past clashed over territorial boundaries in the south Caspian, with the Iranians the only realistic winner of a military confrontation.

The other event at Baku was less a formal declaration or agreement, and more a straw in the wind. Reporters observed an especially cordial relationship between Ilham Aliyev, the president of Azerbaijan, and his counterpart from Turkmenistan, Gurbanguly Berdymukhammedov.

The Turkmen delegation then surprised the others (although probably not the Azerbaijanis) with a statement that the long-mooted but often-postponed TransCaspian pipeline (TCP) should be given the go-ahead after all. The proposal for a submarine pipeline linking the eastern and western shores of the Caspian has been around for years but has always foundered on Russian and Iranian opposition.

Turkmenistan backed up this quite daring proposal by also declaring it was prepared to put a significant amount of its gas reserves through the proposed Nabucco pipeline, which will run from Baku to connect with the main European distribution network in Turkey.

Both these ideas are anathema to Russia and Iran. They represent a flexing of the muscles by the three junior Caspian partners to break the stranglehold both have on exports from the Caspian.

The Russians, in particular, are notoriously suspicious of any move that threatens their own hegemony over supplies to Europe, although formally they are opposed to the TCP - on environmental grounds. Dmitry Medvedev, the Russian president, spoke of the "responsibilities to future generations".

Until now, the Caspian states have been happy to let the status quo prevail, with no final ruling on the lake-sea debate. But the TCP is a game changer, shifting the balance of power from a north-south axis to the east-west.

No wonder the Russians want to make the conference an annual event, starting next year, in Moscow. Expect more metaphysics to mask the realpolitik.