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Pipelines in the Caspian Catalyst Or Cure-All? Fiona Hill

Pipelines in the Caspian Catalyst Or Cure-All? Fiona Hill

Pipe Dreams?

Pipelines in the Caspian Catalyst Cure-all? Fiona Hill

With questions over future prospects for Iraqi oil—’s Fiona Hill is Senior Fellow in the Foreign second largest reserves after —at the forefront of Policy Studies program attention, along with widespread instability in the Middle at the Brookings Insti East, the Caspian Basin and its oil and resources tution. are back on the agenda. The Caspian, along with , West , and , where new discoveries in the have been made, are the great new potential sources of world . These are increasingly vital to addressing the need for new energy suppliers and bypassing OPEC members and Persian states. Although these regions pose signifi- cant difficulties in terms of production and export possibili ties and would not necessarily be competitive with the under a low oil price regime, current high crude oil prices combined with the fact that ’s production potential will not be restored any time soon make them major com- mercial contenders. In the Caspian Basin, the difficulty has never been one of supply—the contains 17 to 33 billion barrels of proven oil reserves and around 232 trillion cubic feet of natural gas.1 It has always been one of overcoming the fact that the Caspian is a landlocked and of transporting energy resources to world markets. With the collapse of the , the region’s limited energy pipeline infrastructure extended only

Winter/Spring 2004 [17] PIPELINES THE CASPIAN across Russia. The new independent positions through their involvement in states of the and Central energy and pipeline negotiations. were locked into a single set of transporta- Regional elites have enriched themselves tion options to the and . through related business deals. Local Oil and gas exports from , populations have viewed BTC as a poten- , and required tial panacea for all the ills that ail the building new pipelines. The Caspian region. And international NGOs have

Caspian governments transformed pipelines from mere transportation projects into means to achieve political and social objectives. region therefore became a focal point in pushed governments and international the , when the first international oil investors to address a host of issues contracts were signed. Because of the including government responsibility and sheer size of Caspian energy reserves, and accountability for energy revenues, the evident importance of export revenues democratization, human rights, and for the future development of faltering environmental protection as part of the regional economies, Caspian govern- pipeline project.2 Since the conclusion ments transformed pipelines from merely of the final host government agreements transportation projects into means to for the pipeline’s construction in 1999, achieve political and social objectives. In many hopes and aspirations have been public debates about Caspian pipelines at invested in BTC along with many mil- both regional and international levels, the of dollars from companies like commercial interests of companies British (BP). investing in the actual energy produc BTC is not the only regional pipeline tion were sidelined and often seemed project to have such high stakes beyond strangely secondary or marginal to other its commercial viability. Pipelines from considerations. Kazakhstan overland to , from The -- pipeline Turkmenistan across the to project (BTC) provides the best example Azerbaijan, and from Turkmenistan of this transformation. The goal of this through and onward to Pak- project is to transport crude oil from istan and , have been seen as means Azerbaijan’s Caspian fields through for reorienting regional export routes Georgian territory to ’s port on toward new markets, or—even more lofti- the Mediterranean. The Azeri and Geor- ly—for reconstructing Afghanistan and gian governments have seen BTC as their fostering peace between Pakistan and lifeline to Turkey and Europe rather than India. In its early stages of development, simply a pipeline. Politicians from both the Baku-Tbilisi-Ceyhan project itself countries have tried to enhance their was portrayed as a prospective “pipeline

[18] Georgetown Journal of International Affairs HILL Pipe Dreams? for peace,” with initial plans to cut ways to build new political and physical through Armenian territory and thereby linkages with the West. Likewise, for the improve relations between and , the BTC project became a Azerbaijan and Turkey, its two regional three-pronged tool in its regional policy. enemies.3 Although the Armenian It was a means of creating an East- option was quickly rejected for a longer West––rather than a North- route through , the idea that the South––transportation corridor from pipeline can eventually promote peace the Caspian to the Black Sea that would and prosperity across the whole region avoid to the south, cement the posi- has not quite been abandoned. And tion of Turkey as the new bridge between while other pipelines remain lines on the the Caspian and Europe, and break map, BTC is rapidly becoming a reality dependence on Russia to the north. on the ground in the Caucasus. BTC addressed several policy impera- tives for Washington in the 1990s. First, The of Caspian it would help to isolate Iran in the Caspian Pipelines. That BTC has been as well as in the Persian Gulf as punish- endowed with so many purposes is not ment for its continued sponsorship of surprising. It began, in many respects, international terrorist groups perpetrat- more as a geopolitical project than a ing attacks against American and allied commercial one. Due to their isolation interests. This was especially important during the Soviet period and their fear of after the August 1996 adoption of the forced reintegra- tion with Russia, Caspian states like Azerbaijan and Georgia sought to reorient them- selves strategically by creating new security and eco nomic ties to the United States and Europe. Turkey was seen by both countries (although not by neighboring Armenia) as a window to the West by Iran Libya Sanctions Act (ILSA) by the virtue of its geographic location, NATO U.S. Congress. ILSA imposed penalties membership, and strategic partnership on major international investors in with the United States. Contracts with Iran’s oil and gas industry. Second, it international oil companies and the would reward Turkey for its support of process of negotiating agreements for the United States during the first Gulf energy pipelines with the Turkish and War and its willingness to forego transit U.S. governments immediately became revenues from Iraqi oil. Turkey’s

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Mediterranean port of Ceyhan was the tors for conflict. In turn, conflict resolu- terminal for Iraqi oil and its economy tion and political and economic stability was hard-hit by the loss of Iraqi crude. in the Caucasus region were crucial for Ceyhan’s infrastructure, relative proxim- the long-term success of international ity to the Caspian, and access to world investment in Caspian oil production. seaways made it an ideal destination for a new pipeline from Azerbaijan. Third, Zero-Sum Games and Commercial BTC would increase export options Concerns. This range of geopolitical beyond Russia and promote the develop considerations and the U.S. policy of ment of multiple pipelines for oil and gas isolating Iran fed popular perceptions in the region. Although there was no spe- of a zero-sum game in Caspian energy cific policy to isolate or even avoid Russia development. In the late 1990s, the as there was for Iran, relations between United States was depicted in discus the United States and Russia soured in sions of energy as pitted against the late 1990s. Russia was increasingly both Russia and Iran in the Caspian. viewed in Washington as a spoiler in Russian and Iranian analysts frequently international affairs and as something criticized U.S. efforts to push the coun other than an honest broker in regional tries out of Caspian projects and both conflicts. And Russian state-run compa governments adopted tit-for-tat strate- nies made life difficult for exporters gies in response to any U.S. policy forced to deal with Soviet-era pipelines, innovation. When, for example, the volatile tariff agreements, and precarious Clinton Administration created a new access during disputes. International oil position in the State Department to companies became increasingly anxious coordinate U.S. executive branch pro- about Russia’s potential stranglehold grams for Caspian oil and gas, Russia over oil and gas exports. responded by appointing not one but As a corollary to these geopolitical two high-level officials with special considerations, BTC and other pipelines responsibility for the Caspian. Russia became the central part of a framework and Iran also concluded agreements on for economic development and conflict strategic energy cooperation in the resolution in the Caucasus—the scene of region, and together tried to the violent ethnic conflicts and civil wars in exploitation of Caspian resources by the late and 1990s. BTC and peace demanding a new division of the Caspian were two important elements of a virtu- Sea’s resources. Russia later softened its ous circle. Energy revenues and transit stance on this issue after discovering fees were essential in boosting the coffers substantial oil deposits in its own sector and legitimacy of cash-starved and weak of the Caspian. central governments in states like Azer- The geopolitical noise around Caspian baijan and Georgia to help them entice and talk of a new back secessionist regions like Nagorno- “Great Game” among the United States, Karabakh and . Trickle-down Russia, Iran, and the other Caspian economic benefits for local communities states were good media fodder in the from energy and related service sector 1990s, but they detracted attention jobs and overall foreign investment were from the overarching commercial presented as eventually outweighing fac- issues. For international oil companies

[20] Georgetown Journal of International Affairs HILL Pipe Dreams? investing in Caspian energy projects, Russia to the port of Novorossiysk that there was a great deal at stake in the could be constructed relatively quickly. machinations over pipelines. The costs This was a shorter route than other of operating without them were high. options proposed—including a project to Under a low oil price regime, overheads build a pipeline from Kazakhstan across made Caspian energy less competitive the Caspian to Azerbaijan. This pipeline on global markets when oil and gas had started to function in October 2001. to be transported over thousands of Trans-Caspian pipelines, on the other kilometers across land and sea. When oil hand, were technically difficult to build production began in the mid-1990s, it and potentially expensive in the absence was transported by and rail across of high oil production volumes. Some Russia or the Caucasus, first to the Black international oil companies also consid Sea, and then from there through ered Iranian transportation options in Turkey’s Bosphorous straits out to the defiance of U.S. sanctions. With its high- Mediterranean. The cost of the rail ly developed energy sector and existing transportation alone was around $34 domestic network of pipelines, Iran was

BTC and other pipelines became the central part of a framework for economic development and conflict resolution. per ton, or about $4.60 per barrel, considered by many investors the cheap- which became a serious issue when oil est and most secure export route. In prices dropped to around $10 per bar 1998, for example, Total, a French com- rel in 1998.4 Companies were often pany, conducted a feasibility study for a forced to suspend oil production when pipeline from the Caspian to Iran’s ports overland transportation options were on the Persian Gulf. Two American not available. Pipelines were essential to companies, Mobil (now subsumed under cutting costs and avoiding the inherent ExxonMobil) and , lobbied the problems of having to constantly offload U.S. government to ease ILSA restric- oil from tanker to rail and back again. tions and allow oil swaps with Iran. This would have allowed them to ship Caspian The Push for BTC. Commercial oil to northern Iranian refineries in concerns drove feasibility studies and exchange for an equivalent amount of Caspian pipeline projects forward, but Iranian crude that could be shipped from the BTC project was not always the pre- Persian Gulf ports to world markets. The ferred option in companies’ calculations. U.S. government resisted these pipeline For example, Chevron, which operated and oil swap projects. the onshore Tengiz oilfield in Kaza- Two other oil pipelines in the Caucasus khstan, pushed for a pipeline from Kaza were also used before BTC to transport khstan overland around the northern tip the first batches of new oil production of the Caspian and then across southern from Azerbaijan to the Black Sea—a Sovi

Winter/Spring 2004 [21] PIPELINES IN THE CASPIAN et-era pipeline from Azerbaijan to Rus- David Woodward also announced that the sia’s Black Sea port Novorossiysk, and a consortium did not anticipate sufficient new pipeline from Azerbaijan to Supsa, a volumes of oil production to warrant Georgian port on the Black Sea. These BTC’s construction before 2005.6 pipeline routes were fully operational by The position of BP and the AIOC 1999, and both the Azeri government and changed quite dramatically after BP’s the Azerbaijan International Operating merger with Amoco, an American ener Company (AIOC), an international gy company. BP’s chairman, Lord John

In many respects, the very prosperity of Azerbaijan and other Caucasus states is at stake in the construction on BTC. consortium of ten major oil companies Browne, took the strategic decision to exploiting Azerbaijan’s Caspian fields, make the Caspian one of the center- considered expanding them to export pieces of the company’s global portfolio main oil production. The U.S. govern and endorsed BTC. Some analysts saw ment played the decisive role in modify this decision as directly related to BP’s ing this plan, fearing that its sanctions merger and its desire to cooperate with regime would soon be breached and that the U.S. government now that it had new Iran would become a viable option for interests in the United States. But BP Caspian oil exports. also had to factor other considerations While intense U.S. diplomacy suc into its decision-making. The Turkish ceeded in convincing the governments of government, international environ Azerbaijan, Georgia, and Turkey to con- mental groups, and even oil companies clude the host government framework had pointed to the dangers of straining agreements necessary for the construc- the already limited capacity of Turkey’s tion of BTC, the oil companies proved narrow Bosphorous straits with more difficult to persuade. The AIOC increased tanker traffic from the Caspi- and its company, BP resisted an. U.S.-Iranian relations showed little ‘geopoliticking’ and remained focused sign of improvement and it was clear that on business considerations–whether the United States would continue to BTC was commercially viable or not. block Iranian transportation options for Early cost estimates for the construction the foreseeable future. The considerable of the pipeline varied from $2.4 to $3.8 financial considerations related to the billion and, after oil prices hit a major construction of BTC were also somewhat low of around $10 per barrel in 1998, the eased by a dramatic rise in world oil AIOC was understandably cautious. prices (up to almost $40 a barrel and a Reports suggested that the consortium ten-year high by 2000), and by Turkey’s could lose as much as $3 billion in prof decision, under U.S. guidance, to offer its over thirty years by using BTC as its a maximum cost or completion guaran- main export pipeline if oil prices were tee to the AIOC for pipeline construc low.5 In March 1999, AIOC Chairman tion. The U.S. government also offered

[22] Georgetown Journal of International Affairs HILL Pipe Dreams? financial assistance through its trade of BTC and its related projects will be agencies.7 BP’s decision to endorse BTC unique. No other private sector projects was crucial in pushing the project forward. of this magnitude are likely to material- In November 1999, a new framework ize. The success of BTC and the overall agreement was signed during the OSCE profitability of Caspian oil production summit in Istanbul between BP, on will also certainly determine the extent to behalf of the AIOC, and the Turkish, which other foreign investment invest- Azeri, and Georgian presidents. In this ments are made in other regional sectors agreement, BP/AIOC pledged to secure in the future. the financing for the construction of the In many respects, the very prosperity pipeline, and the Turkish government of Azerbaijan and other Caucasus states is agreed to pay for cost overruns in excess at stake in the construction of BTC. The of $1.4 billion on its portion of the collapse of the region’s centrally planned pipeline.8 In addition, the three govern- economies after the dissolution of the ments reached an agreement to build a USSR was compounded by the effects of gas pipeline from Shah Deniz, the newly the regional conflicts of the 1990s. Hun- discovered Azeri natural gas field, that dreds of thousands of people were dis- would run parallel to BTC up to the placed in the region and many more left Turkish . It would then continue for Russia. The loss of human resources to the Turkish city of Ezerum, where it through emigration, the contraction of would connect with an existing gas domestic markets, and the few opportu- pipeline network and supply Turkish nities for international trade limit the consumers. On its way through the Cau Caspian states’ potential for development casus, this new pipeline would also pro outside the energy and related service vide natural gas to Georgia to address the sectors. Furthermore, even though there country’s chronic energy shortage. The is an abundance of energy available for new parallel oil and gas pipelines added export, the Caspian region suffers from a to the overall geopolitical and economic domestic energy deficit. Regional con importance of the BTC project. sumers lack the ability to pay utility bills and the energy distribution infrastruc- A Pipeline for Regional Prosperity? ture for households and industry is in The BTC pipeline project broke ground extremely poor condition. All the states, in September 2002 in Baku and was including Azerbaijan, still depend on billed as the largest private sector con Russia for power and gas supplies. struction and investment project in the These concerns preoccupy govern- Caucasus. When completed, it will ments, local populations, and NGOs. extend 1,760 kilometers across three Since 2000, international NGOs like countries. At its maximum capacity in Human Rights Watch, Friends of the about 2010, it will carry a through-flow , Transparency International, and of one million barrels of oil a day, and many others have launched a major pub will be the central element of a projected lic advocacy and outreach campaign to $20 billion investment package that press BP, the AIOC, the BTC manage- includes up and down-stream projects.9 ment company, the Azeri and Georgian Most analysts inside and outside the governments, and international finan region recognize that the scale and extent cial institutions involved in building the

Winter/Spring 2004 [23] PIPELINES IN THE CASPIAN pipeline, to address myriad issues relat- Georgia, and Turkey, the construction of ed to the pipeline’s construction and one pipeline to the Mediterranean cannot other regional issues. Indeed, the allo- overcome the otherwise disadvantageous cation by governments of export rev- location of the Caspian. The series of legal enues and transit fees is still to be deter- and political agreements that made BTC’s mined. Other issues have been raised, construction possible have created a com- including the environmental impact of plex set of relations among the three the pipeline, the preservation of impor- countries, the United States, and interna tant cultural sites along the route, land tional energy companies, but the pipeline purchases for the construction of the cannot be substituted for other economic, pipeline, employment for communities political, and security relations with the along the pipeline, community oversight West. Nor can it tie fractured countries of the construction process, and the like Azerbaijan and Georgia back together central and local governments’ response again or replace regional cooperation in to public protest and the concerns of the Caucasus—especially given the fact that communities at different phases of the it bypasses Armenia. project. As of the end of September And there are few examples of 2003, one year after the groundbreak- pipelines promoting peace. Instead, ing ceremony, 200 kilometers of there are plenty of examples of pipelines pipeline had been laid along the BTC traversing areas of considerable insta- route and a 400-kilometer construction bility in , , corridor had been prepared through and elsewhere. The higher costs of Azerbaijan, Georgia, and Turkey. Of the operating in conflict zones, and of pro- 10,000-strong workforce on the pro- tecting and repairing pipelines, are fac- ject, 7,000 local nationals had been tored into companies’ calculations. employed. The BTC operating company Most existing and proposed energy had also deployed teams of archaeolo- pipelines in the Caspian region run gists to excavate and record data at through conflict zones. In 1999, oil ancient sites uncovered during con- exports were suspended when the struction in Georgia.10 pipeline from Baku to Novorossiysk was ruptured due to the war in . Conclusion––Catalyst or Cure- Restoring service required building a all? Regardless of the geopolitical and route bypassing Chechnya through the other considerations behind the decision neighboring republic of . In to build BTC, the pipeline is primarily a the future, the Baku-Novorossiysk commercial venture to transport to oil pipeline is unlikely to play any signifi- from the Caspian to world markets. The cant role in a peace settlement in companies involved in the project will Chechnya, just as BTC is not likely to be move ahead regardless of the complexities the deciding element in resolving the if their negative impacts do not outweigh conflict between Armenia and Azerbai the commercial benefits. The pipeline’s jan over Nagorno-Karabakh. ultimate success also depends on issues Although they cannot ensure peace, detached from the Caspian region such pipeline projects—especially on the scale as the long-term fluctuation of world oil of BTC—can provide an important eco- prices. While BTC can link Azerbaijan, nomic boost through infusions of invest

[24] Georgetown Journal of International Affairs HILL Pipe Dreams? ment and creation of jobs at the World Bank, not of oil companies and local level. But pipeline projects like BP. Pipelines are a catalyst for devel- cannot solve the overall under-develop- opment but not a cure-all for the politi- ment of regional economies. Large-scale cal, economic, and social problems of economic development projects are the regions like the Caucasus and the broader purview of international institutions like Caspian Basin.

NOTES

1 See figures provided by the U.S. Department of version of the pipeline from Baku to Supsa, which Energy’s Energy Information Agency (EIA), August would offer $17.5 billion in profit. 2003, available online at: http://www.eia.doe.gov/ 6 See “Turkey, AIOC Begin New Round of Discus- emeu/cabs/caspstats.html. These figures would put the sions on Baku-Ceyhan,” Newsbase, FSU Oil and Gas Mon Caspian’s oil reserves on par, at the lower end, with itor (30 March 1999), 5; and “AIOC Head Says MEP and with the United States on the upper end; Will Only Be Profitable under Certain Conditions,” and its natural gas resources at the same level as Saudi Newsbase, FSU Oil and Gas Monitor (27 April 1999), 17. Arabia. 7 Haitham Haddadin, “United States, Turkey Try 2 See, for example, Svetlana Tsalik, Caspian Oil - to Speed Baku-Ceyhan Pipeline,” Journal of Commerce (23 falls: Who Will Benefit? (New : Open Society Institute, April 1999). Caspian Revenue Watch, 2003). 8 Jane Perlez, “Strategic Issues Aside, Focus on Oil 3 See Jack Maresca, “A ‘Peace Pipeline’ to End the Pipeline Turns to Money,” New York Times (21 November Nagorno-Karabakh Conflict,” Caspian Crossroads 1 (Win- 1999). ter 1995). 9 For this and other information see BTC, Co. 4 Cited from Russian pipeline company “Regional Review: Economic, Social and Environ Transneft’s figures in Neft i Kapital (January 1999), 51. mental Overview of the Southern Caspian Oil and Gas 5 Reported in “Pipelines: Azerbaijan,” Caspian Projects” (February 2003). Investor (January 1999), 28. As outlined in the article, 10 BTC, Co., “Construction gathers momentum, with estimated construction costs of $3.8 billion and passes milestone,” BTC Bulletin (25 September 2003), low crude oil prices, Baku-Tbilisi-Ceyhan would gen available online at: http://www.caspiandevelopmen erate $14.5 billion in profit, in contrast to an expanded tandexport.com/ASP/LatestNews.asp?ArticleID=14.

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