You Can't Call This Pipeline A Pipedream Now
By Vladimir Socor
Ground was broken last week on construction work for the pipeline that will bring oil from the Caspian Sea directly to Western consumer countries. The presidents of Azerbaijan, Georgia and Turkey, along with American officials and the managers of some of the world's leading oil companies, gathered on September 18 near Azerbaijan's capital to inaugurate the construction of the Baku-Tbilisi (Georgia)-Ceyhan (Turkey) oil export pipeline. Next month, those same countries and Western partners are expected to launch construction work on an export pipeline for Caspian natural gas.
Bringing Caspian fuels directly to consumer countries is the most important development in international energy economics and politics in the last 30 years. Caspian oil reserves are estimated to at least match those discovered in the North Sea a generation ago, or those of Alaska at about the same time. As the Middle East turns increasingly volatile now, Caspian reserves can make a critical difference -- both in terms of pricing and in diversification of energy supplies -- to the enlarging Euro-Atlantic world.
Provided, of course, that the Caspian pipeline routes promote competition and diversification by circumventing Russia or Iran. These two countries are themselves among the leading energy exporters, and they promote international political agendas of their own. Routing the Caspian pipelines via Russia or Iran would substantially add to the energy export flows they already control. It would give them stronger economic and political leverage on Caspian producer countries, as well as on consumer countries downstream.
The oil pipeline from Baku to Ceyhan on Turkey's Mediterranean coast is designed to supply mainly the southern European markets in the first stage, and additional European markets afterward, with the high-quality, light Azerbaijani oil. It is planned to become operational in early 2005, at an annual capacity of more than 20 million tons, to increase to more than 50 million tons annually by 2008. The line runs for 1,760 kilometers overland and is projected to cost $ 2.9 billion in the first stage until 2005, to be financed mostly by international banks and lending institutions. The Baku-Tbilisi-Ceyhan consortium (BTC), whose shape was finalized last month, will directly finance some 30% of the cost.
Operated by British Petroleum with a 38% stake, the BTC consortium includes Azerbaijan's State Oil Company as the second-largest shareholder at 20%, as well as Norway's Statoil, the American companies Unocal and Delta Hess, Turkish Petroleum, Italy's Eni, France's TotalFinaElf, and Japan's Itochu and Inpex companies. The consortium's configuration reflects world-wide interest in bringing Caspian oil to market, as well as the companies' risk-sharing strategy, which is a characteristic of Caspian energy projects.
With an operating life projected at 40 years, the line will be dedicated primarily to the Azeri-Chirag-Guneshli (ACG) offshore oilfields in Azerbaijan's sector of the Caspian Sea. This is the extraction project known as the "contract of the century," originally signed in 1994 and valued at more than $10 billion. Of that sum, $ 5.2 billion is earmarked to bring these fields to full production at some 50 million tons annually by 2008. Operated by British Petroleum, with a 34% stake, the ACG consortium includes Unocal, ExxonMobil, Delta Hess, Devon, Statoil, Azerbaijan's State Oil Company, Russia's Lukoil, Turkish Petroleum, and Itochu, with stakes ranging from approximately 10% to 3%. Lukoil, which is Russia's biggest oil company, with a 10% stake in the ACG extractive project, once indicated an interest in joining the BTC pipeline project as well, but renounced that under pressure by the Russian government, which opposes that pipeline.
Initially, Moscow opposed both the extractive project and the pipeline. Once it realized that the Western companies were determined to go ahead with ACG, Russia reconciled itself to the development of those fields and allowed Lukoil to get a piece of that action. But it grew shrill in opposing the Baku-Tbilisi-Ceyhan pipeline, hoping thereby to discourage Western investment in that project, and to promote instead a pipeline route to Russia's Black Sea port of Novorossiisk. Only recently did Moscow accept the inevitable and tone down its opposition to BTC.
Even so, the Russian government stayed away from the Sept. 18 inaugural ceremony in Azerbaijan. Moreover, on that very day, Russian Foreign Affairs Minister Igor Ivanov used his appearance at the Eurasia 2002 summit in New York to insist that the BTC pipeline project is commercially unprofitable, that Azerbaijan does not have enough oil to fill the pipeline, and that the project's real goal is "to oust Russia from regions where it has historic, legitimate interests. Russia can't accept that." Ivanov again urged Western oil companies to export Azerbaijan's oil via Russia, as is the case -- he pointed out -- with the oil from Kazakhstan. Meanwhile, the two consortia and Azerbaijan itself plan to export almost the entire available output to the Ceyhan terminal, sending only symbolic annual volumes on the "northern route" to Novorossiisk.
At BTC's inaugural ceremony, Georgian President Eduard Shevardnadze credited the United States as the "world leader" and Turkey as "regional leader" for promoting the East-West energy corridor, of which this oil pipeline and the planned, twin gas pipeline are centerpieces. Mr. Shevardnadze described these projects as vital to "integrating Georgia and Azerbaijan into the Euro-Atlantic space" -- a vision that Mr. Ivanov was publicly opposing that same day.
Clearly, the BTC project has acquired an unstoppable momentum. Moscow's fallback position -- in tandem with Iran -- is to limit the scope of the East-West energy corridor by opposing trans-Caspian pipelines that would bring oil and gas from Kazakhstan and Turkmenistan, via Azerbaijan, Georgia and Turkey, to European countries. Geographically and economically, Turkey is the predestined transit country for such pipelines. To play that role, Turkey should act faster in linking up its pipeline networks with those of Greece.
Georgia is the sole available exit for westbound pipelines from the Caspian basin. This fact may well figure in Moscow's calculations when it seeks to fan chaos in that country, to intervene militarily there and to topple Mr. Shevardnadze in the name of "antiterrorism." Last month, moreover, Russia's military staged the biggest demonstration of force ever in the Caspian Sea. The naval exercises appeared designed at least in part to back up Moscow's political veto on trans-Caspian pipelines. At present, Russia enjoys a near-monopoly on the transit of Caspian oil, having preempted almost all of Kazakhstan's exports for years to come. It also transits the bulk of Turkmenistan's gas exports.
While the oil and gas pipelines from Azerbaijan are laid, the U.S. and especially the European Union should encourage Kazakhstan and Turkmenistan to participate in the trans-Caspian projects, bringing their oil and gas to Europe via Turkey. The resulting, aggregate export volumes would help reduce the Middle East producers' financial and political clout over consumer countries, without transferring some of that clout to Russia or to Russian-led cartels.
These pipelines could cement the Caspian producer countries' independence, anchoring them irreversibly to the Western consumer countries. The Kremlin's attitude toward westbound Caspian pipelines will provide a major indicator of President Vladimir Putin's actual, as distinct from declared, willingness to cooperate with the West.
Mr. Socor is a Senior Fellow of the Washington-based Institute for Advanced Strategic and Political Studies.
This article originally appeared in the Wall Street
Journal Europe on September 27th, 2002.
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