THE ARMENIAN CENTER FOR NATIONAL AND INTERNATIONAL STUDIES

THE NEGOTIATION OF “THE CONTRACT OF THE CENTURY” AND THE POLITICAL BACKGROUND TO THE REVIVAL OF AZERBAIJAN’S OIL INDUSTRY

ARA SANJIAN, PhD Associate, Armenian Center for National and International Studies Professor, Haigazian University, Beirut

© 1997, Armenian Center for National and International Studies This publication may not be reproduced or published, in whole or in part, without the express written consent of the Center. The views of the authors do not necessarily coincide with those of the Center.

pbeat assessments by renowned western politicians have recently become commonplace regarding the future of the rejuvenated oil industry in the newly independent former Soviet republic of Azerbaijan, a relatively small country on the western shores of the U Caspian Sea with a population of about 8 million. Most oil industry analysts now tend to agree with both the view expressed by former British Energy Minister Lord Fraser that Azerbaijan’s “oil-rich Caspian shelf and new oil fields will certainly become one of the main sources of world oil production in the 21st century,”1 and that of former United States Secretary of Defense Richard Cheney, for whom the Caspian region as a whole “may be the first world-class oil province to open since the North Sea.”2

Out of an estimated 1,000 billion barrels (approximately 170 billion tons) of proven oil reserves in the world, one recent estimate puts the total Caspian share at some 27.5 billion barrels (4.6 billion tons).3 Azerbaijan’s total oil reserves were estimated in another survey carried out in 1995 at around 4 billion barrels. In comparison, countries of the Organization of Petroleum Exporting Countries (OPEC) are believed to possess about 700 billion barrels of reserves, with Saudi Arabia alone having around 260 billion barrels of oil, and Iraq some 110 billion.4 Proven reserves are usually determined, however, relative to available technology and economic conditions, and their level is constantly revised upward as the world economy grows and new and more sophisticated production techniques are introduced. Additionally, since most of Azerbaijan’s oil is located in offshore fields which have yet to be explored, some industry experts suggest that the country’s own oil reserves may eventually run as high as Kuwait’s, those currently estimated at around 95 billion barrels of oil.5 If true, this estimate will put Azerbaijan’s reserves well ahead of those in many well-known oil producing countries such as Iran, Venezuela, the United Arab Emirates, Mexico, the United States of America, Libya, Nigeria, and Algeria.

Azerbaijan’s reserves gain added international importance in light of the recent projections made about probable changes in the landscape of the world’s oil production distribution early next century. According to oil policy expert Hooshang Amirahmadi, “the trends in growth rates of possible oil substitutes indicate that by 2010, the share of oil in energy generation will decline, but the amount of decline will not be so significant as to bring a major change in oil demand,” with world consumption likely hovering around 85 million barrels per day (b/d), or 4.3 billion tons annually.6 While member states of OPEC–particularly those in the Persian/Arab Gulf–will collectively continue to remain the world’s largest suppliers ahead of Russia with her vast Siberian oil fields, production in the Gulf of Mexico is already experiencing a gradual yet certain decline despite many costly interventions. Norway’s North Sea fields will maintain production for the next few years, but they too will eventually experience decline.7 In light of the expected influx of western technology and investment in the next few years, however, Turkey’s state oil company Botas estimates that the Caspian can become by the year 2010 the world’s third largest oil-producing region, with an estimated annual production of 120 million tons.8 Azerbaijan’s own onshore and offshore output is currently projected by western experts to peak at around 1.15 million b/d (approximately 55 million tons annually) around 2012.9 This will certainly not represent a negligible amount, particularly in light of the expressed desire of the western industrial countries to diversify their oil sources and reduce their future energy dependence on Gulf states. U.S. national security adviser Sandy Berger described the Caspian Sea region in March, 1997, as “extraordinarily important to our future... I think we have a very strong geostrategic, as well as economic, interest in developing our relationships in that area of the world.”10

2 Historical Beginnings

The history of Azerbaijan, and in particular that of its current capital, Baku, has always been intimately connected with oil, the country’s principal natural resource. Indeed, throughout Azerbaijan’s history oil deposits have lain so close to the surface in Baku and the nearby Absheron Peninsula that crude has regularly leaked out of the ground on its own, resulting in significant oil production from hand-dug pits which date back to ancient times and long precede the introduction of drilled wells.

The first reliable information about oil extraction on the Absheron Peninsula appears in the seventh and eighth centuries A.D. Oil was initially extracted by very primitive ways. Until the ninth century it was simply collected on the surface with the help of cloth and transported by caravan or by sea in seal skins obtained from the Caspian. Later wells were sunk and the oil was scooped out in leather bags. A device somewhat like a multi-dipper crane was invented to facilitate the process. Shelters, sometimes made of stone, were constructed over the wells to make work possible in any weather. The extracted oil–medieval Arab sources mention that it was yellow, black, green, or even white in color–was used for lighting, heating, lubrication, burning lime, making varnish and lacquer, cleaning clothes and removing stains. It also served as paint thinner and even as medicine. Some oil was utilized in thickened form for roof insulation, and until the invention of fire-arms in the sixteenth century oil was widely used in warfare. Refining and relatively advanced drilling techniques became known after the thirteenth century, and in the fifteenth century 200 mule loads of oil were reportedly daily exported from the pits near Baku. In the ensuing centuries a modest yet profitable trade in oil made Baku an important link between Persia and Russia.11

The Oil Boom under the Tsars

The systematic exploitation of the natural riches of the Caspian shore began only after the Russian occupation of the area in 1806. The first paraffin plant in the world was built in Baku in 1823, followed by the drilling of the world’s first deep bore-hole in 1847, the erection of an oil refinery in 1859, and the construction of a kerosene plant in 1863. The Russian Imperial government, which possessed monopolies in oil extraction, refining, and trade, initially leased the Baku oil fields for four-year spans to selected entrepreneurs, giving special treatment to Armenian capitalists. This system was abolished in 1872, however, because it gave incentive to oil trade rather than to extraction. The government then introduced lease by tender, hoping that with the security of their holdings assured oilmen would invest more money and care in their operations, thereby generating long-term benefits. Although local Armenian businessmen were challenged by this new system, their dominance in the oil industry was only slightly affected. Together with Russians they then became some of the major buyers of oil land. Few local Muslims succeeded in doing the same. Initially the latter owned none of the companies that produced over 165,000 tons of oil annually; Muslims were more numerous in small-scale extraction activity and in refining.12

The arrival in 1873 of Robert and later that of Ludwig Nobel, the brothers of Alfred Nobel–the inventor of dynamite and founder of the Nobel prizes–also contributed to the expansion of Baku’s oil industry. They established the Nobel Brothers Oil Extracting Partnership, which soon became one of the world’s major oil companies. The Nobel brothers introduced new technology and

3 business methods in Baku. They pioneered the use of railway tanks, launched oil tankers in the Caspian, and constructed a pipeline to reduce drastically the expenses connected with transport. They also invented several kinds of black mineral oil for heating ship engines, and used iron reservoirs for oil storage. The Nobels were followed to Baku by the French branch of the famous Rothschild family and the British company, Shell. By the end of the 1880s these three companies together extracted more than half of the oil then harvested in Baku, and marketed two-thirds of the total amount of extracted oil as well.13

Despite the dominance of these giants, the rapid growth of the oil industry after 1870 ensured that many others could likewise turn a profit. Local oilmen copied Nobels’ methods, and after 1883 the latters’ share of the market shrank. By 1900, Baku had more than 3,000 oil wells, of which 2,000 were producing oil at industrial levels. The city’s oil assumed international significance and played a leading role in Russia’s industrial expansion. Output rose from approximately 715,000 tons in 1872, to around 10.8 million tons in 1891, and peaked out at approximately 12 million tons in 1901. That year Russia was the world’s leading producer of oil, responsible for 47% of the world’s total output, most of this extracted from the Baku region.14

According to historian Ronald G. Suny, within a few short decades the development of the oil industry transformed Baku into both a capitalist city located in a feudal land, and a proletarian oasis surrounded by a peasant population. One may also contrast the city’s multi-ethnic composition with the largely Muslim population of the surrounding Azerbaijani countryside. No other town in the Russian empire experienced such quick growth rates as did Baku. The city that was home to approximately 3,000 inhabitants at the beginning of the nineteenth century had by 1913 become the largest one in Transcaucasia, with a population of 214,600 in Baku proper and 119,300 in outlying industrial districts.15

Baku became famous as a wild boomtown replete with grand hotels, telephones, casinos, gas-lit streets–and even prostitutes and lawlessness. The relatively high wages offered to oil workers attracted young men to the city not only from Azerbaijani villages, but also from across Russia and even abroad.16 For these youth, Baku held a romantic excitement, conjuring up images of easily made fortunes and adventure. They came not only to work in the oil fields but also to find oil and get rich themselves. By 1917, there were 95,000 Muslims living side by side with 90,000 Russians and 63,000 Armenians in the city. Most administrators, managers of the larger companies, technicians, and skilled workers were Armenians and Russians, while the local Muslims together with migrants from Persia and Daghestan formed the bulk of the drillers and field workers. Still the new class of “oil industrialists” was sufficiently international in character. By the beginning of the twentieth century, of the 167 oil companies based around Baku 55 were owned by Armenians, 49 by Azerbaijanis, 21 by Russians, 17 by Jews, 6 by Georgians, and 19 by foreign nationals. These entrepreneurs began to dominate the city’s economy and politics. Baku also blossomed culturally as industrialists vied with each other in erecting enormous mansions and public houses designed by Russian and foreign architects.17

After 1901, however, Baku suffered a net decline in oil production. In 1913 oil output was 3.3 million tons less than in 1901. For decades Baku industrialists had neglected to innovate technologically, and once saddled with heavy taxes found it harder to compete with the Americans. The foreign market for Baku oil shrank, leaving domestic consumption as the sole sales outlet. Many smaller firms went bankrupt and a consolidation of companies took place which gave the larger companies even greater influence and power in the industry. As the demand for oil was still rising in Russia, however, the decline of the supply of oil helped boost prices and profits upward.18

4 The Baku Oil Fields in 1914-20

In its role as docile supplier of the oil which lubricated the Imperial war machine, Baku was of critical importance to Russia during the First World War (1914-18). Shortages of coal led many companies to convert their heating systems to oil. Despite decreasing labor productivity, the decline in output was reversed thanks to more intensive exploitation of existing oil fields and the opening of new ones. Only about 20 percent of oil-related workers were drafted into the Russian army between 1914 and 1917, and the industry as a whole was not seriously hurt by mobilization. Workdays were lengthened, and more days were added to the work-week. The price of oil steadily climbed until a fixed price for raw oil was established in 1916. In view of the rising costs of obtaining oil, the government-imposed fixed price reduced the incentive to drill. In order to ensure delivery of oil to the military and industry, the government hence had to force extractors first to fill the orders which came from the Ministry of Communications.19

After the establishment of Soviet power in Baku in 1917-1918 and the nationalization of the oil industry, the local Bolsheviks did their utmost to keep the flow of oil and oil products open to the fledgling Soviet republic. The amount of oil exported increased dramatically at the expense of previously stored supplies, while the decline in drilling remained colossal.20 The city was ultimately captured by the Ottoman army in September 1918, ushering in a brief period of Azerbaijani national independence (1918-1920). The oil industry was again denationalized, yet production remained at a fraction of its pre-war level.21

Oil Production in Azerbaijan under Soviet Rule

After the complete sovietization of Azerbaijan on April 28, 1920, the Baku oil industry was renationalized. The Azerbaijan Nationalized Oil Industry Board became responsible for oil extraction. A republican ministry of the oil industry was created in 1954.22

With political turmoil causing oil extraction to fall to only 2.46 million tons in 1921–the same level produced in 1872–the Soviet regime first restored oil plants and other industries, and then put new installations into operation. The volume of drilling increased 70 times in the first five years.23 Azerbaijan soon became a major manufacturer of oil products, synthetic rubber, and mineral fertilizers, accounting for 70% of total oil-related equipment produced in the Union of Soviet Socialist Republics (USSR). Azerbaijani factories produced new types of drills and pumps. Overall oil extraction grew four fold in the next seven decades, and nearly 80,000 people were employed in oil-related jobs by the late 1980s. Baku, especially the Azizbekov Petrochemical Institute established there in 1920, became famous for its achievements in oil-related research and technical breakthroughs. Azerbaijani oil experts also participated in the discovery of oil and gas fields in the other republics of the USSR, and in countries friendly to the Soviet regime, among these Vietnam, Cuba, Algeria, Yemen, India, China, Iraq, and Angola. Natural gas production also increased, and several large pipelines were constructed in the 1960s and 1970s which linked the Baku gas fields to Moscow and other cities in the USSR.24

5 The Development of Offshore Wells

The Soviet period was also noted for the pioneering of offshore Caspian oil production on a large scale, especially after the end of the Second World War. While it had been clear since the end of the nineteenth century that the Caspian seabed was rich in oil, offshore extraction began only in 1923 and eventually generated most of the country’s oil. Seventeen offshore fields were still in production in 1995. During the seventy years of Soviet rule, Azerbaijan produced approximately 170,000 tons of oil from the shallow waters of the Caspian.25 The all-Union organization Kaspmorneftegas was responsible for sea platforms in the Caspian as well as for oil and gas drilling in the Baltic and Black Seas. A platform yard–the only one of its kind in the USSR–was set up to build football pitch-sized deep-sea platforms that weighed up to 20,000 tons each. These platforms were later delivered to site by special dump-barges.26

The famous Neft Daslari (Oil Rocks) steel sea platform began operation on November 7, 1949, 110 kilometers (km) offshore. It had a population of 4,000 with 200 km of streets, blocks of flats, evening schools and a branch of Baku’s Oil Industry Technical School, a local bakery, a hot-house that grew lemons and tangerines, a lemonade plant, and even rose beds. Most of its inhabitants worked in shifts–a week on the Oil Rocks, and a week onshore.27

Baku Oil during the Second World War and Its Aftermath

During World War II, the USSR again benefited immensely from Baku’s oil. Overall, Azerbaijan produced 75 million tons of oil (or around 70% of the total Soviet oil output) during the USSR’s Great Patriotic War of 1941-45. This was in addition to 22 million tons of gas and other oil products (including around 90% of the USSR’s aviation fuel and lubricating oils).28 The production of 25.4 million tons of oil in 1941-42, the first year of war against Germany, is still an all-time national record. By the summer of 1942, all the oil workers in Baku were working 18 hour shifts, with no days off, no holidays, and no vacations until the end of the war. By 1944, women accounted for 60% of the work force.29

Baku’s oil deposits were among Germany’s targets during its September, 1942 offensive in the Caucasus. The threat of an attack was felt so strongly that the Soviet authorities terminated drilling operations in Baku that summer and began to evacuate their most valuable machinery and equipment farther east. By that autumn, 764 wells had been sealed and 81 complete sets of drilling equipment and their personnel were transported to Turkmenistan. Only in late 1943, after the front line had been gradually pushed back, was intensive drilling work reestablished. Many of the sealed-off wells turned out to be impossible to restore, however, and oil extraction was considerably reduced. Only 11.5 million tons of oil were extracted in 1945.30 The threatening loss of the Baku oil wells prompted the search for oil in other parts of the USSR.

Extensive exploration of alternative reserves of both oil and natural gas began in the late 1950s and led to the discovery of the extremely large Volga-Ural basin. Oil was also struck in the West Siberian Lowland in 1959. Azerbaijani experts now argue that the central Soviet authorities in Moscow knew that there were still vast oil fields offshore in Azerbaijan, but they redirected all resources toward these promising new fields and away from the cash-starved Baku industry. If in 1965 annual oil

6 production in Baku had stood at 21.5 million tons, it had dropped to 13.1 million tons by 1989. By 1991, Azerbaijan was producing only 3 percent of total Soviet oil. Oil-drilling equipment had become very old and worn out and there were severe ecological problems caused by the lack of investment.

The Caspian was polluted, and due to refineries and the chemical industry air quality became poor, particularly in Baku and Sumgait. Groundwater was also affected by onshore exploration. Azerbaijan remained a relatively poor republic–even by Soviet standards–and during the glasnost years under Mikhail Gorbachev, Azerbaijani economists repeatedly accused Moscow of having bought their oil all those years at a cheaper price than that of mineral water.31 Western experts note, however, that even with more funding, Azerbaijan could not have increased oil production sharply under Soviet rule. Its onshore wells had begun to dry up, while Moscow simply had no up-to-date technology for deep- water drilling.32

Indeed, since the disintegration of the USSR and because of the ensuing economic collapse of the old Soviet order and the ongoing nine-year-old armed conflict with the Armenian majority of the former Autonomous Region of Mountainous Karabagh, Azerbaijani oil output has continued to decline. Production fell from around 11 million tons in 1992 to around 10 million tons of oil and 7 billion cubic meters of gas in 1994. Most of the oil produced was consumed locally. Annual domestic oil consumption was estimated at about 8 million tons in the early 1990s.33 Net oil exports amounted to only 33,000 b/d in 1994, bringing in an annual revenue of only $291 million. Baku’s two oil refineries, which together could refine 22 million tons of oil annually, were operating at only 40% of their capacity in 1996. Due to shortages of funds, particularly for drill pipe, exploratory and development drilling also declined. Indeed, Azerbaijan’s gross domestic product contracted about 60% between 1991 and 1996, subjugating most people to a life of poverty. Average wages in state jobs, where millions are still employed, stand at a meager average of $30 a month. Azerbaijanis nevertheless hope that this overall decline will be reversed in 1997 with the help of western investment–especially that in the energy sector. Fueling their hopes is the $342 million foreign investment figure given by Azerbaijan’s Economy Ministry, a number which rose five fold in 1996 alone, 80% of this invested in the oil sector.34

The Return of Western Interest in Azerbaijani Oil in the Post-Soviet Era

The first western oil industrialist to take interest in Baku’s oil in recent times was Steve Remp, the founder, chairman and chief executive officer of the Aberdeen-based British company, Ramco Energy plc. He comes from a family long interested in oil. In the early 1970s, soon after some of the vast Siberian fields had opened up, Steve’s father, Tom Jr., traveled throughout the USSR in search of oil deals. In 1986, Steve himself began a series of journeys into the USSR in pursuit of oil. Over the next five years, he made more than 30 such trips. On one of these trips, he linked up in Moscow with Dimitry Stolyarov, an oil engineer born in Azerbaijan, who had once worked for Steve’s father. Stolyarov handed Remp a copy of a letter written in the 1970s by the wealthy American businessman, Armand Hammer, who, as President of Occidental, had tried to gain exploration rights in the Caspian from Moscow’s Oil and Gas Ministry. Stolyarov persuaded Steve to go to Azerbaijan himself, and, in May 1989, the latter visited Baku to explore the possibilities of doing oil-related business. In August 1990, he signed an agreement with Kaspmorneftegas to help the latter find western investment partners. Remp was given access to considerable amounts of data. He returned to Aberdeen and soon

7 realized that if the data were correct, there were giant oil fields in Azerbaijan’s southern Caspian basin. He made his first call to British Petroleum (BP) immediately afterwards.35

In 1991, the government of Ayaz Mutalibov, the then Communist President of Azerbaijan, began negotiations with representatives of several western oil companies who had already established single-room offices in Baku’s Intourist Hotel.36 In June of the same year, Houston-based Amoco Production was selected to operate the estimated 1.75 billion barrel Azeri field, and in September signed the joint venture Area of Mutual Interest agreement with BP, Den Norske Stats Oijeselskap A/S (Statoil) of Norway, Ramco, Unocal and McDermott International Inc. of New Orleans. Ramco, in turn, was granted exclusive negotiation rights for the estimated 1.2 billion barrel deep-water Guneshli field in early 1992 and soon formed a partnership with Pennzoil of Houston to begin these negotiations.37 Yet the only actual deal that almost got signed during Mutalibov’s tenure was with the US MEGA Oil Company, which promised to exchange oil contracts for assistance in improving the regime’s security services.38

Oil Negotiations during the Presidency of Abulfaz Elchibey

Despite the slightly suspicious attitude of the international companies, which were negotiating without any legal framework or investment guarantees and in the absence of rules governing how tenders and concessions were to be awarded, it was left to Abulfaz Elchibey’s nationalist Popular Front government which came to power in June, 1992, to make rapid strides toward opening up Azerbaijan’s oil industry to foreign investment.39

Elchibey first purged the corrupt old guard close to Mutalibov, and on September 13 he combined the Azerineft and Azneftexim state concerns–established following the collapse of the USSR to manage oil exploration and extraction, and to provide transportation and refining–to create Azerbaycan Respublikasi Dˆvlet Neft Sirketi, known in English as the State Oil Company of the Azerbaijan Republic (SOCAR). It is the largest employer in Transcaucasia with over 75,000 employees. Its President nominally carries the rank of minister, and reports directly to the Prime Minister. Elchibey’s close adviser Sabit Bagirov was named to that influential post.

Under these new arrangements, BP and Statoil gained approval to conduct an exploratory survey of the Chirag field, which had been capped during the Soviet period and whose reserves of recoverable oil were thought to have been exhausted, and the prospective oil field of Shah-Deniz.40 BP expressed readiness to invest $2 billion in the project, and the British government sent former Prime Minister Margaret Thatcher to Baku to facilitate the agreement’s signing.41 On November 9, 1992, SOCAR then signed five Memoranda of Understanding with various foreign oil companies to establish working groups to study and plan development and coordination of joint infrastructure, export and offshore pipelines, onshore processing facilities, an offshore marine fleet, and an onshore supply base for the Chirag, Guneshli, and Azeri fields. Another consortium composed of BP, Statoil, and Ramco began to focus on improving oil facilities and reviving oil equipment manufacturing.42

In the meantime Amoco, Pennzoil, McDermott and others also sought opportunities to develop large onshore and offshore natural gas reserves, responding to Azerbaijan’s desire to harness its natural gas, much of which had previously been allowed to escape into the atmosphere. Azerbaijan

8 hoped that, by switching from oil to the much cheaper gas as an energy source for electrical power plants, it would eventually free up more oil for export. SOCAR and Pennzoil signed a gas utilization agreement in October, 1993, to gather the vented gas from the Guneshli field, and compress and transport it to a processing plant south of Baku. McDermott became involved in the construction of the pipeline which would carry the gas to Pennzoil’s compression facility.43

In June,1993, SOCAR announced a Declaration of Utilization which consolidated the Guneshli, Chirag and Azeri fields. The foreign oil companies involved in the previously separate three projects agreed to this measure, and soon thereafter Amoco, Pennzoil, Unocal, BP, Statoil, McDermott, Ramco and Turkiye Petrolleri Anonim Ortakligi (TPAO) formed a consortium to pursue the now combined deal. At this early stage, BP and Statoil held a combined 36.7% stake in the consortium; Amoco, 24.3%; Pennzoil and Ramco, a combined 17%; Unocal, 16%; McDermott, 3.5%; and TPAO, 2.5%.44

With the negotiations seemingly finally underway, the western companies began to invest heavily in bonuses, demonstration projects and charity just to indicate their willingness to be nice to whichever government was in place in Baku. BP, for example, paid a high proportion of the cost of enlarging the city’s airport, while Pennzoil freely gave steel for piping.45 These widely publicized measures were also likely intended to convince the still suspicious Azerbaijani public that the western companies had not simply come to replace the Russian Communists as new foreign exploiters of Azerbaijan’s natural riches, but to show that their involvement would bring the country various benefits in addition to the direct profits to be made from the extracted oil.

The leaders of the Popular Front government nevertheless kept dragging out the final stages of negotiations, possibly, as some foreign experts feared, to leech out the last corrupt dollars they could–even demanding $600 million as a signing bonus to finalize the deal. On June 21, 1993, a preliminary signing bonus of $81 million was indeed made to SOCAR by the consortium, and President Elchibey was finalizing plans to go to London and sign the much anticipated contract when he had to flee Baku as a consequence of a putsch by the mutinous army commander Surat Husseinov.46

The Conclusion of Oil Negotiations under President Heidar Aliev

During the presidential election campaign of 1992, Elchibey had promised the electorate to crush the Armenians of Mountainous Karabagh. After a few initial successes that summer, however, the tide had turned against him, and the Azerbaijani forces had suffered a series of battlefield setbacks. Searching for scapegoats, Elchibey dismissed Husseinov, who had reportedly become a millionaire under communism in the 1980s when he ran a wool-processing plant in the town of Yevlakh, and who had parlayed his economic clout into political power in the immediate post-Soviet era by commanding a private militia based in the town of Ganje near the disputed territory of Mountainous Karabagh. Husseinov refused, however, to obey the President’s orders and instead turned his forces toward the capital.

Elchibey’s supporters claim that the government of the Russian Federation assisted Husseinov in order to punish the Azerbaijani President, who was seen as being pro-western and anti-Russian, and who had kept Moscow out of the ongoing oil negotiations. They point out that the former Soviet

9 104th Airborne Division stationed in Ganje, the last significant Russian military unit in Azerbaijan, had pulled out earlier that year, leaving its arms and munitions to the supporters of Husseinov. With the rebel forces advancing unhindered to Baku, Elchibey fled to his home region of Nakhichevan. In this turmoil, Heidar Aliev, a former Communist Party leader in Azerbaijan, and himself a Nakhichevan native, moved in to Baku to fill the vacuum left by Elchibey. He ultimately assumed the presidency himself and appointed Husseinov as the new Prime Minister.

Aliev froze negotiations with the foreign oil companies on the 25th of June, a few days after assuming the presidency. He had reportedly been impressed by the agreement signed in Kazakhstan by the American oil company, Chevron. He criticized Elchibey’s concession as insufficiently lucrative and ordered its renegotiation. Natiq Aliyev (no relation to the President) was appointed as the new chief of SOCAR, and a new negotiating team headed by Dr. Manafov was selected in August to negotiate new terms with the consortium.

Aliev also adopted a more balanced policy vis-a-vis Moscow. Under his leadership Azerbaijan joined the Commonwealth of Independent States in September, 1993, yet Aliev continued to resist the deployment of Russian troops on Azerbaijani territory. Realizing, moreover, that Russia exercised enough influence in the region to hinder progress in negotiating and implementing oil deals signed with western companies–by denying, for example, access to the Volga River, the best route to get heavy industrial equipment needed to modernize oil extraction techniques in the Caspian–Aliev also awarded the Russian oil giant, LUKoil, a minimum 10% equity share from Azerbaijan’s original 30% stake under Elchibey’s terms.47 After the introduction of SOCAR and LUKoil into the consortium, its participating interests constituted the following: BP, 17.1267%; Statoil, 8.563%; Amoco, 17.01%; Pennzoil, 9.8175%; Ramco, 2.0825%; Unocal, 11.2%; McDermott, 2.45%; TPAO, 1.75%; LUKoil, 10%; and SOCAR, 20%. Then, in October, the Guneshli field was removed from the concession, and plans were made to develop it jointly between SOCAR and LUKoil. The other western companies were asked to negotiate a joint venture agreement with SOCAR only for the remaining Chirag and Azeri fields.

In November, 1993, Aliev came close to a new deal that would have raised Azerbaijan’s share of proceeds to 80% instead of 70% as under Elchibey’s concession terms. He also managed to persuade the western companies to add $200 million to the previously arranged $300 million signing bonus. It was estimated that Azerbaijan would ultimately receive under this deal $94 billion in profits over 35 years, and $24 billion for the companies. During the first decade, however, Azerbaijan’s proceeds would only total 30%, as the companies would seek to recover their share of the $7 billion in projected development costs.48

In December, however, the Azerbaijani government renounced the ongoing negotiations and dismissed the negotiating team led by Manafov. Industry analysts thought that this move sought to get more western aid for Azerbaijan against a Russian effort to consolidate Moscow’s economic and political influence in the region. Moreover, they rightly believed that Aliev would now agree to a lower return over the long term if he could receive more in the first 10 years of production.49

On February 4, 1994, Aliev directly assigned to SOCAR the responsibilities of carrying out the negotiations with western consortium members, and the preparation and execution of the projected contract. Thereafter, four major joint negotiating sessions were held between SOCAR and the foreign oil companies. During the first round in Baku in March, both sides presented their basic approaches in regard to the financial model of the contract and the major technical issues. The next two rounds in May and June were held in Istanbul, which led to fewer interruptions than had been the case in

10 Baku because of better access to telecommunications between the foreign oil company representatives and their home offices. A priority work program was discussed regarding the scope of operations to develop the fields’ optimum levels of production and the mechanism for finances, as well as the principles and terms of cost recovery and profit sharing. It was at this stage that, as a means to generate rapid return on investment, a plan was first drawn up for the early recovery of some of the investments by proposing early oil production and export prior to the completion of the construction of the main export pipeline. This could be achieved through the reintroduction of the deep water portions of the Guneshli field into the contract.50 SOCAR and the western companies signed a Protocol of Intention in Baku on July 15, and ten days later their top-level officials began a fourth and final round of meetings in Houston, which lasted until the 10th of September.51 In the meantime a private sector Saudi oil company, Delta Nimir Khazar Ltd. (DNKL), had also joined the consortium as a 1.68% stakeholder after its purchase of 15% of Unocal’s initial share of 11.2%.52

The “Contract of the Century”

SOCAR and the nine foreign oil companies finally signed a Production Sharing Agreement–the standard formula whereby companies secure a direct return for their investment–in Baku on September 20, 1994. It called for a total $7.4 billion investment over the next 30 years in three offshore oil fields of Azeri (113 km from the Caspian shore), Chirag (94 km), and deep-water Guneshli (82 km). Their total oil reserves are estimated at 520 million tons, and their natural gas deposits at around 55 billion cubic meters.53 Additional platforms, offshore pipelines, terminals and export water pipelines will also have to be built, while $2 billion will be allocated separately to construct pipelines to transport the oil to hard currency markets.

The contract stipulated two major stages for implementation. “Early oil” production would begin from the deep water fields of Guneshli at 40,000 b/d 18 months after the signing of the contract (i.e., in mid-1996) and would ultimately rise to 80,000 b/d (approximately 4 million tons per year) over seven years at an investment cost of some $350 million.54 It was estimated that a total amount of 32 million tons of “early oil” will be extracted during those first seven years. Within 54 months of the signing of the contract (i.e., in mid-1999), however, the main export pipeline should be in operation. Crude exports from this megastructure would then reach 300,000 b/d (approximately 15 million tons per year) by 2004 and full capacity development would peak at a production level of around 700,000 b/d (approximately 35 million tons per year) by 2010.55 A total of 511 million tons of crude will be extracted under this contract over the envisaged 30-year period.

The contract also stipulated that all development funds would be shared by members of the consortium in proportion to their final division of stakes. A sliding scale mechanism factoring output and oil prices would determine the exact division of profits, of which the Azerbaijani government would receive 75% as royalties. The remaining 25% would be divided among the members of the consortium, again based on their final division of stakes.56

Preliminary estimates calculated immediately after the signing of the contract put Azerbaijan’s profit from royalties at $78 billion over the next 30 years, while the foreign consortium companies would get $22 billion. Even from this $22 billion, government-owned SOCAR would now get an additional 2.5% profit share as an investor. Thus, 77.5% of the entire profit from this project would go to the government

11 of Azerbaijan. An estimated 55 billion cubic meters of gas to be extracted would also wholly belong to Azerbaijan, and if reserves of oil and associated gas prove to be larger than estimated, Azerbaijan would receive approximately 88% of this extra oil (including the value of the taxes on additional foreign oil company profit) and 100% of all associated gas.57

The Azerbaijani government would also receive $400 million from the consortium as a signing bonus. Of this total, $81 million had already been paid to the government of Elchibey in June, 1993. Another $170 million was paid after the agreement was ratified by Azerbaijan’s parliament on December 12, 1994. $75 million will be due when production reaches 40,000 b/d (probably in 1997), and the final instalment of $75 million will be given when export of the oil through a pipeline commences. Finally, during the signing ceremony of the contract, the consortium members presented an additional $5 million gift to President Aliev for the rejuvenation and refurbishing of a hospital in Baku and $50 million to a governmental social fund to be used upon parliament’s ratification of the contract.58

Russian Objections over the Status of the Caspian

Although Stanislav Pugach, the representative of the Energy Ministry of the Russian Federation, had signed the September 20 agreement on behalf of his government, the Russian Foreign Ministry declared that same day that Russia would not recognize the legitimacy of the contract until all littoral states concluded a new agreement concerning the status of the Caspian Sea.59 This perceived contradiction led many western observers to suggest that there were different centers of power in Moscow with sometimes contradictory visions as regards energy exports from the newly independent countries of the former Soviet South. On the official level at least, Russia has since insisted that the Caspian is not a sea and therefore the 1982 International Convention of the Law of the Sea, which says that landlocked seas can be carved up among the countries that border them, cannot be applied in this case. Russia argues instead that the Caspian is simply a lake and hence its resources, including the oil deposits, should be shared by all littoral states. Moscow demands a condominium that will place the entire Caspian, save for narrow strips along the coastline, under the common control of its five littoral countries: the Russian Federation, Iran, Azerbaijan, Turkmenistan, and Kazakhstan. Russia bases its current claims on its own interpretation of the right of free navigation enshrined in the Russian-Persian treaty of February 26, 1921, and on the principle of equal treatment of vessels in each other’s ports contained in the Soviet-Iranian Treaty of March 25, 1940.60

Azerbaijan does not recognize treaties made by the former USSR, and argues that the Soviet-Iranian agreements mentioned pertain only to the coastal access rights of Soviet and Iranian fishing vessels in the Caspian–not to oil rights under the sea.61 Baku argues that according to international conventions, there is a significant difference between fishing and mineral rights in the sea. Fishing rights are limited to 12 miles from the coastline. With mineral resources, the seabed–and not the sea surface–is taken into consideration, and since the seabed is composed of soil, and not of water, definite measurable boundaries do exist between countries. The seabed, like that of the North Sea, is usually divided up among littoral countries by obtaining for each country the same distance from off shore to the center of the sea. The Azerbaijanis claim that in the past the Caspian was divided according to this principle into economic regions among the neighboring Soviet republics. Iran, which had its own sea boundary with the USSR, was excluded from this division. No republic–Russia included–had previously challenged this division, according to which Azerbaijan has about 80,000 square kilometers of the Caspian floor; Turkmenistan, almost the same; Kazakhstan, 113,000; and Russia, 64,000. Moreover,

12 according to Azerbaijani oil specialists, all the research, discoveries, geophysical findings, and exploitation of the gas and oil resources in the now disputed oil-rich region of the Caspian had since the 1970s been always given to and carried out by them.

Based on such a division of the Caspian seabed, however, Russia and Iran will get the least oil, and perhaps this is why Iran has consistently backed the Russian point of view.62 Moscow and Tehran signed a joint declaration on October 30, 1995, which strongly opposes the division of the sea into national zones, and both countries insisted on the indivisibility of the sea’s mineral resources as the “common property” of all coastal states. When addressing the State Duma–the lower house of the Russian legislature–on April 11, 1997, the President of the Iranian parliament Ali Akbar Nateq Nouri urged Caspian states to reach agreement on the legal status of the Caspian Sea, which he termed “the core of Russian-Iranian cooperation.”63 The next day, he accused the United States, Iran’s arch-enemy, of encouraging Azerbaijan to disagree with other states bordering the Caspian and warned Baku against giving Washington a chance of using disagreements among the Caspian states for its own interests. Nateq Nouri said Iran, Russia, and Turkmenistan had similar views on the Caspian, and the three countries had tried hard yet failed to reach a compromise with Azerbaijan and Kazakhstan.64

It is interesting to note, however, that the Russian and Iranian insistence on redefining the status of the Caspian has not hindered Russian and Iranian oil companies from trying–apparently with some government backing–to obtain stakes in some of the oil deals that have already been finalized with the government of Azerbaijan, this despite the unresolved legal status of the Caspian.

Azerbaijani Oil, the Coup Attempt in Baku, and the Chechen War

Russian opposition to the “Contract of the Century” is believed to have extended beyond the domain of legal matters. In early October, 1994, Aliev blamed Russia for being behind the political instability that hit Azerbaijan in the few weeks that followed the signing of the contract. This turmoil culminated in a mutiny led by the Deputy Chief of the Special Police Department, Ravshan Javadov, and the seizure of the airport and other strategic buildings in Ganje by forces loyal to Prime Minister Husseinov. Aliev managed to suppress the attempted revolt by imposing a state of emergency, and dismissed Husseinov, who fled to Russia. Azeri officials also later accused Husseinov of involvement in an attempted coup in 1995 and of trying to organize in 1996 an attempt on the life of President Aliev, in which a group of assailants allegedly planned to shoot down his presidential plane. The Azerbaijani government therefore viewed Husseinov’s continued presence in Russia as a major stumbling block to improving ties between the two countries and repeatedly pressed Moscow to find and extradite him. He was eventually arrested near the central Russian town of Tula on March 20, 1997, and extradited to Baku a week later, where he was charged with large-scale embezzlement and with “exceeding his authority.”65

Moreover, some observers suggest that the signing of the oil contract was also partly linked to Moscow’s decision to attempt a final crushing of the secessionist regime of president Jokar Dudayev in Chechnya through a full-scale military assault in December, 1994. The Russians hoped that the oil pipeline running from Baku via Chechnya to the Russian port of Novorossiisk on the Black Sea could be an important transport route for the export of Azerbaijani oil to the West. Whoever controlled that

13 pipeline would therefore be in a position to strongly defend its own interests not only in Azerbaijan but also in Kazakhstan, which possesses large oil reserves yet lacks access to an open sea.

The Establishment of the Azerbaijan International Operating Company

The ratified contract went into effect on December 12, 1994, and member companies of the oil consortium soon thereafter established the Azerbaijan International Operating Company (AIOC) to provide long-term planning and to conduct the day-to-day operation of the three oil fields. AIOC began with a staff composed of only five foreigners and 15 Azerbaijanis in January, 1995. Its first meeting was held on January 24, 1995, and Terry Adams of BP was chosen to lead the company for the first five years. AIOC is subordinate to the Contractor Management Committee, which has to agree on all proposals that will subsequently be presented to the governing Steering Committee overseeing the operations of AIOC. The Steering Committee, all of whose decisions must be unanimous and whose chair is the President of SOCAR, was initially composed of 11 representatives from SOCAR and the government of Azerbaijan on the one hand, and another 11 representatives from the foreign oil companies on the other. By the end of 1996, however, AIOC staff had grown to include some 120 foreigners and nearly 375 Azerbaijanis. Moreover, an additional 1,000 Azerbaijanis were then also working for AIOC as subcontractors.66 Its headquarters in Baku, Villa Petrolea II–named after the Nobel Brothers’ office at the turn of the century–was officially opened by President Aliev on August 24, 1996.

The Search for a Pipeline

Azerbaijan is a landlocked country with no access to the open seas. The construction of a large new pipeline is therefore essential to export oil to the western markets. Intense deliberations to find a suitable route were in progress even before the ratification of the contract took place.

Finding such a route acceptable to all sides involved in the deal has not proved easy, however. Under ideal conditions the shortest and cheapest pipeline route from Azerbaijan would have been through Iranian territory to the oil terminals at Bandar Abbas or Kharg island located on the Persian/Arab Gulf. Such a pipeline has been ruled out, however, given the objections voiced by U.S.-based companies. Also rejected has been a subsequent Iranian suggestion to swap oil, whereby Azerbaijan would deliver oil to northern Iran for internal use in that region and Iran in turn would export equal amounts from the Gulf on behalf of Azerbaijan.67

Understanding that the Iranian route would not be realized due to American pressure, Turkey, a country short of primary sources of energy except for hydropower, stepped in to the fray. It views the Azerbaijani oil deal both as an opportunity to acquire a stable and relatively cheap source of energy and as an opportunity to extend its influence in the newly-independent Muslim republics of the former USSR. On March 4, 1993, the Turks signed a $1.4 billion contract with Azerbaijan’s oil minister to construct a 1,060 km pipeline designed to carry 40 million tons of oil annually from both Azerbaijan and Kazakhstan to Turkish Mediterranean ports. Turkish oil officials anticipated then that the construction of this pipeline would begin in 1994 and end within three years. The signed

14 agreement did not specify, however, the territory which the pipeline would cross after leaving Azerbaijan and before entering Turkey–whether it be Iranian, Armenian, or Georgian.68

The injection of LUKoil into the foreign oil consortium in the autumn of 1993 cast doubts, however, on the realization of this Turkish route. Russia preferred to see Baku continue shipping its oil through an expanded version of the existing Druzhba pipeline, which currently carries Russian oil to Slovakia and on to Western Europe, or through constructing a new pipeline to Novorossiisk. From there, Russian experts proposed, supertankers would carry the oil through the Strait of the Bosphorus into the Mediterranean.69 The Russian suggestion was initially met with skepticism. Other consortium members doubted that LUKoil would be able to transport the anticipated vast quantities of Azerbaijani oil through these suggested routes, for the Russian company, they argued, had already committed these same pipelines to export oil extracted by Chevron from Kazakhstan. Turkey in particular balked about the heavy traffic the Novorossiisk route would create through the Bosphorus and expressed fears that any oil spillage would be disastrous to Istanbul’s fragile ecosystem. Additionally, since the Montreux agreement of 1936 which governs passage through the straits of the Bosphorus and the Dardanelles permits the free use of the waterway by all powers in peacetime, Turkey tried to obstruct the Russian proposal by enacting, on July 1, 1994, certain restrictions on tanker traffic through the straits, allegedly to improve safety. Russia retaliated to these Turkish restrictions that autumn by proposing to transport the oil instead by tanker from Novorossiisk to the port of Burgas in Bulgaria, from where a new pipeline to the Greek port of Alexandroupolis would then be constructed by a Russian-Greek consortium.70

The consortium’s decision in 1994 to divide oil production from Azerbaijan into “early” and “main” stages also introduced a two-stage approach to the pipeline issue. AIOC immediately established a sub-unit in London to find technical and financial solutions to this problem. This sub-unit is directly involved with SOCAR and the government of Azerbaijan to identify viable route options. It is also charged with facilitating government-to-government protocols which should eventually become commitments and means with which to attract the financing of banks, particularly the World Bank and International Finance Corporation. AIOC hopes that its project will eventually develop into a new pipeline company in which the current shareholders in the consortium will participate. It may even ultimately turn into a broader based export pipeline company also involving companies outside the consortium which are already investing in other states bordering the Caspian.71

Since the amount of “early oil” to be shipped from Azerbaijan during the first seven years will be relatively small, the Russians proposed that an existing pipeline between Baku and Daghestan–originally constructed so that it could work in opposite directions–be considered as the primary route for export. This pipeline was in quite good condition; only its present direction had to be reversed so that oil could flow out of Azerbaijan. To push this option forward, Russia proposed to finance the repairs needed for its portion of the pipeline from Daghestan to Novorossiisk.72

Western countries did not want all “early oil” to flow through this northern route to Novorossiisk. Turkey, in particular, feared that this option would ultimately reduce the prospects of the construction of a Baku-Ceyhan pipeline for the “main oil.” In late 1994, therefore, Turkey’s President Suleyman Demirel proposed that “early oil” should be exported via a western pipeline through Georgia. This alternative to rebuild an existing pipeline through Georgia to the Black Sea coast, from where ships could carry the oil out to the Mediterranean, had not previously been under serious consideration due to the ongoing civil war and subsequent instability in Georgia following the collapse of Soviet rule. The political situation in Georgia had stabilized to some extent, however, by the end of 1994, making

15 Demirel’s proposal feasible. Turkish leaders hoped that part of this projected Baku-Supsa pipeline could ultimately form a section of a Baku-Ceyhan pipeline for the “main oil” which could thus cross Georgia instead of Iran or Armenia.

The Turkish government hence decided to lobby for Turkish companies to be involved in the upgrading and, in some parts, construction of this western oil pipeline. Moreover, to make this western route economically competitive, Ankara initially provided guaranteed attractive tariff levels. It also guaranteed concessionary financing to AIOC, if needed, in case the latter decided to build the pipeline itself. Otherwise, Turkey would ask to be authorized to create a project company–with the participation of the governments of Azerbaijan and Georgia and other commercial participants–to build and operate the pipeline itself under specified tariff terms and conditions. Turkey even invited Russia to participate in this pipeline project as an equity partner and offered to purchase at market rates all the “early oil” exported via this route. It said it would construct a new refinery on Turkey’s Black Sea coast and use the purchased oil for domestic purposes in northern Turkey or sell it to other customers. Only small amounts would then be shipped through the Bosphorus.73

After protracted talks, and last minute high-level pressure from Washington in favor of the western route, a compromise agreement was finally reached on October 9, 1995.74 AIOC did not want to offend either Russia or Turkey at this stage and decided to use both routes–via Russia and Georgia–to export the “early oil.” Each line would have an initial capacity of 100,000 b/d, with the ability at least to double that capacity with additional pumping facilities (for a combined total of more than 400,000 b/d). This compromise was primarily of political nature as it made no sense economically to use two separate pipelines for transporting an annual output of only 5 million tons of oil over the next eight years.75 Azerbaijan has since signed two separate Transport and Intergovernmental Agreements with both Russia and Georgia to put these two plans into effect.

The Northern Route

To upgrade the northern pipeline from Baku through Grozny and Tikhoretsk to Novorossiisk, the total length of which is 1,411 kilometers, a 750,000-barrel capacity coastal terminal–enough to hold about a week’s production of “early oil”–had to be constructed, together with a pumping station capable of handling 80,000 b/d. Moreover, a new 17 km stretch of pipeline had to be laid from this new terminal to Azerbaijan’s main pipeline to Grozny. A 31 km section of line to the Azerbaijani town of Gyuzdak should also be reconstructed, and a further 10 km of line be laid from Gyuzdak to the Baku-Grozny line. Finally, as mentioned above, the flow of an existing 340,000 b/d pipeline between Baku and southern Russia had to be reversed.76 The estimated cost of upgrading the section from Baku to the Russian border is estimated at some $75 million, and an additional considerable sum will be required to expand the handling capacity of the terminal at Novorossiisk.

On January 18, 1996, Aliev signed an agreement in Moscow with Russian Prime Minister Viktor Chernomyrdin on operating this pipeline, according to which AIOC will be responsible for transporting Azerbaijani oil to the Russian border, while the Russian state-owned company, Transneft, which owns the transport systems for all of Russia, will then deliver the equivalent amount of oil to Novorossiisk, where it will be loaded on to tankers and exported to other countries. The northern

16 route was expected to be fully operational in August, 1997, and the amount to be pumped through this line would then increase gradually to reach an annual total of at least 5 million tons in 2002.

In order to create the requisite pressure in the oil pipeline at the 255 km long section connecting Baku to the Azerbaijan-Russia border, however, it was necessary to pump into this pipeline 60,000 to 70,000 tons of oil. Transneft, AIOC, and SOCAR agreed that the filling of the northern pipeline should begin in Baku on January 1, 1997, and an initial shipment of 30,000 tons of Azerbaijani oil was planned to be carried to world markets in February, followed by deliveries of another 40,000 tons in March.77 When AIOC pumped Azerbaijani oil up the northern route to the Russian border in February, 1997, however, Transneft was unable to take delivery and asked for a delay until the 1st of October. The Russian company argued that the delay was justified because the agreements it had signed with AIOC and SOCAR applied only to oil produced from the Chirag and Guneshli offshore fields in the AIOC contract zone, and not to oil produced by SOCAR at other fields.78

Observers suggested, however, that the real reason behind this delay was in all probability the unresolved dispute between the federal authorities in Russia and the local secessionist regime in Grozny on who should control and benefit from the flow of oil across the republic of Chechnya. Indeed, with the end of fighting in Chechnya and after its holding of presidential elections in January, 1997, the pipeline issue has gained added importance. During the two long years of the war, both Chechen and federal Russian troops made special efforts not to damage the pipeline, and income from the transit of Azerbaijani oil is now considered as one of Chechnya’s very few potential sources of revenue for the foreseeable future. On November 23, 1996, the Chechen leadership signed an agreement with the Russian federal government in Moscow pledging not to block the flow of oil. This deal was followed by a cooperation agreement signed on May 23, 1997, by the Russian Fuel and Oil Ministry and Chechnya’s state-owned Southern Oil Company (YuNKO), whereby Grozny undertook to “service and safeguard the oil and gasoline pipelines crossing Chechnya.”

A separate agreement will be signed on reconstruction of the Baku-Grozny-Tikhoretsk pipeline, which is estimated to cost $1.2 million. The chairman of YuNKO has estimated that the 150 km stretch of the Baku-Novorossiisk export pipeline running through Chechnya can be repaired within 20-30 days once $2 million are made available.79 Terms for transportation of oil through Chechen territory, the question of ownership of that section of the pipeline, and oil transit fees are yet to be finalized, however. YuNKO has rejected the rate of $75,000 promised by Transneft for transporting the oil through Chechnya, and has demanded approximately one-seventh to one-eighth part of the total profit–just about the proportion of the pipeline stretch that passes across Chechnya–as its share of the transit tariffs.

The Russian federal authorities have argued, however, that it is not correct to assess the profit from the transportation of oil in relation to the length of the pipeline, for if a pumping station is located on a small stretch of a pipeline, the share of profit on this section should increase sharply.80 Moreover, the Chechens want AIOC to sign a separate agreement with them so that they would get paid for the use of the pipeline directly by the consortium rather than by Transneft to guarantee the security of the pipeline along the stretch transiting their republic.81 Other sources suggest that the Chechen leadership will agree to the transportation of Azerbaijan’s Caspian oil to Novorossiisk only if Russia approves the construction of a second pipeline to transport Kazakhstan’s oil from the Tengiz field through Grozny to Georgia where it will link up with the Baku-Supsa pipeline.82

17 These Chechen preconditions may be very difficult for Moscow to agree to. The latter has its own strategic considerations and seems ready to suffer a loss of its international prestige by delaying the transport of oil through the northern line. Russia even appears willing to tolerate the strengthening of the position of Georgia as its main competitor as oil transporter through the Caucasus, if only to dictate to Chechnya the economic conditions of its survival and thus to force Grozny to change its mind about seeking independence from Moscow when the time comes to negotiate the final status of Chechnya.

If these problems are solved soon, however, and recent indications are that they may be, reconstruction of the northern pipeline might be completed by October, 1997, only slightly delaying the export via this pipeline of the first “early oil” from the Chirag field.

The Western Route

On March 8, 1996, President Aliev was in Georgia to sign an agreement on the transport of “early oil” via the western route; it was ratified by the Georgian Parliament on the 2nd of April.83 In this case, AIOC will operate the pipeline from coast to coast between Baku and Supsa to transport oil from Azerbaijan and perhaps from Turkmenistan and Kazakhstan as well. Under the pipeline lease agreement, however, AIOC and SOCAR will have the first priorities for export through this pipeline during the first 30 years. The total length of the pipeline will span 926 km, including 480 km in Azerbaijan and 446 km in Georgia. The rehabilitation of this pipeline is more complex and will cost around $315 million. AIOC has decided to increase its capacity from 5 to 10 million tons. Construction started in March, 1997, and is expected to end by December, 1998.

The project provides for reconstruction of 601 kilometers of an Azerbaijani-Georgian pipeline. A former natural gas pipeline which runs through Azerbaijan right to the Georgian frontier will be extended by newly-laid pipe all the way to the Black Sea. An existing pipeline between the Tbilisi area and the Black Sea coast will be upgraded and refurbished, as it was originally constructed some 25 years ago and merely consists of a maze of old pipelines linked to the ports at Batumi and Poti. AIOC has identified some 800 illegal taps made into it by people seeking access to oil for heating. Approximately 258 km of the pipeline have to be built from scratch, including a stretch of at least 140 from Akhstafa to Tbilisi. Five pumping stations will also be constructed, as will two stations for lowering the pressure in Georgia, a telecommunications network, data control and cathode protection systems, sea-based oil facilities, and a new ground-based oil terminal at Supsa.84

Finding the large sum required to upgrade the western route has not been easy. When the Turkish government demanded that certain stringent conditions be met before it would provide this sum, including a commitment by AIOC that a Baku-Ceyhan pipeline would ultimately be constructed for the “main oil,” AIOC decided to finance the construction of the pipeline itself.85 Since then, the Australian company McConnel Dowel Middle East has won a tender to reconstruct the pipeline and began doing so in May, 1997. It will lay a new 39 km pipeline (530 mm in diameter) from the Azerbaijan-Georgia border to Samgori and repair the existing one from Samgori to Supsa. AIOC and the Georgian Pipeline Company have also given Norway’s Kvaerner John Brown Ltd. an order for managing repairs and construction of this pipeline. The latter will hence supervise McConnel Dowel Middle East.86

The European Bank for Reconstruction and Development and the French government have also expressed readiness to invest in upgrading the western pipeline, as well as to help Georgia realize the

18 idea of a Euro-Asian Transport Corridor (EATC).87 This project foresees the expansion of existing road, rail, and telecommunications links, as well as ferry services across the Caspian and Black Seas; its ultimate purpose is to revive the so-called historic “silk route” by linking China, Central Asia, and the Transcaucasus with Europe.88 The first step towards establishing EATC was taken on December 16, 1996, when Ukraine, Georgia, and Azerbaijan signed deals to establish a new Black Sea ferry link between the Ukrainian port of Illichevsk near Odessa and the Georgian port of Poti. This link now only serves trucks, but will soon serve trains as well. The platform of the train-ferry that is to be added in September, 1997, will be able to carry 130 railroad cars. The project will cost around $400 million, but will give Ukraine, which currently imports from Russia almost 70% of the total 30 million tons of oil it needs annually, an extra 4 million tons of oil per year by 2000.

Georgian experts say that once construction at an oil terminal in Batumi is complete, 25-28 million tons of Azeri oil can be delivered annually to Ukraine.89 Ukraine, which is also already building an oil terminal with an early annual capacity of 40 million tons near Odessa, as well as a new pipeline from Odessa to the Druzhba pipeline in western Ukraine, hopes to use the new link to export Azeri oil to Europe.90 Aliev has publicly supported this option, and a joint Ukrainian-Azerbaijani memorandum was signed to this effect during President Aliev’s visit to Kiev in March, 1997.91 Although such shipments will be very expensive, they will nevertheless satisfy not only Baku’s wish to bring its oil to international markets by skirting Russia, but also Ukraine’s desire to reduce its dependence on Russia and acquire alternative oil and gas sources.92 Ukraine likewise hopes that the pipes and other equipment for the gas and oil industries which it produces will be used in projects to modernize the Georgian section of the western oil pipeline.93

The Search for the “Main Oil” Pipeline

According to the contract of September, 1994, AIOC should have made a decision for the long-term transport of “main oil” by June, 1997, with the pipeline carrying this oil set to be operational by mid- 1999. Latest indications show, however, that a final decision on the route of the main oil export pipeline will be deferred for some time because of the continuing political uncertainty in the Caspian Sea region. The vice president of AIOC told the Russian newspaper Segodnya on April 30, 1997, for example, that no decision on an export pipeline will be taken this year.94

In the meantime, more than half a dozen options for a final route remain in contention. Turkey continues to lobby for a Mediterranean route–probably across Georgia–which completely bypasses the Black Sea and the Bosphorus and ends at the Turkish port of Ceyhan. Backed by various international environmental circles, Ankara is still arguing that handling the “main oil” via the northern route will inevitably require a 20% increase in tanker traffic through the Bosphorus, and that such a sharp increase in the volume of oil passing through the strait can pose an ecological threat both to the waterway and to the city of Istanbul itself.

Moreover, Turkish circles also seriously question the alternative Russian proposal to transport Caspian oil by tanker from Novorossiisk via Burgas to Alexandroupolis. They point out that this Bosphorus bypass line will necessitate cumbersome double-handling of oil, i.e., loading, off-loading and loading oil onto tankers. The Turks also maintain that large ships will encounter difficulties in negotiating a route around the numerous small islands in the Aegean near Alexandroupolis.95 According to Ankara, the proposed pipeline to Ceyhan will best meet the commercial needs of the energy companies and the

19 nations involved, for Ceyhan already possesses a modern tanker loading and storage facility (that is linked to an existing Iraqi oil pipeline) and needs no additional construction. It can handle the largest tankers in service, those far larger than the size that can navigate through the Bosphorus, and has four times the capacity of the port of Novorossiisk. Furthermore, Ceyhan enjoys mild meteorological conditions and can operate 365 days a year; as for Novorossiisk, the difficult meteorological conditions that exist there forced the closure of the terminal for 74 days in 1994 alone.96

The Turkish government itself is willing to finance the $2.5 billion project to construct a pipeline capable of carrying 45 million tons annually. It does not anticipate, however, that this will be necessary and believes that member companies of the AIOC will ultimately invest money both as owners and as operators of the projected “main” pipeline. Turkey likewise hopes that Chevron, in its desire to get Kazakh oil to western markets, will eventually become involved. Finally, it expects international finance organizations to seek involvement in this project and even become equity holders. Indeed, the World Bank agreed in September, 1996, to provide a $5 million loan for a feasibility study and environmental audit for the various routes along which a Baku-Ceyhan pipeline could be constructed, and the following month a high-ranking Turkish delegation was invited to Washington to participate in an extensive “brainstorming session” regarding the Baku-Ceyhan link.

Turkey promises that if the Mediterranean route is chosen, the lowest international shipping rates to key cities in Western Europe will be available–approximately half the estimated cost from Novorossiisk. It is ready to guarantee competitive, non-discriminatory tariffs and access. Turkey has also promised to guarantee operational safety and will therefore pay for the route if the pipeline were to be damaged or the flow of oil interrupted.97

Publicly at least, Azerbaijan has recently shown preference toward the Turkish option. The Declaration on the Development of Strategic Partnership signed in Ankara on May 5,1997, by Presidents Demirel and Aliev supported Turkey’s bid for the transportation of Caspian oil from Baku to Ceyhan.98 This agreement was quickly followed by another deal which Turkey signed with Shell, Eni (Italy), Chevron, and Unocal to set up a joint venture to build a Baku-Ceyhan pipeline charged with carrying Azerbaijani and later Kazakh oil to western markets. Turkey will be represented in this joint venture by Botas.99 What is more, the presidents of Azerbaijan and Kazakhstan signed an additional agreement in Almaty in June, 1997, regarding the construction of a pipeline on the bed of the Caspian Sea which would link up with the Baku-Supsa export pipeline. After meeting in Baku on the 19th of May with Aliev, Nick Zana, director-general of Tengiz-Chevroil (the U.S.-Kazakh company developing the giant Tengiz field), said his company is prepared to invest in Azerbaijan to increase oil exports. Earlier in 1997, a trial shipment had been sent by barge across the Caspian to Baku and from there by rail through Georgia to Batumi, where the crude was loaded onto tankers for sale on international markets.100

Officially, Turkey is not placing any stipulations on Azerbaijan as to which country–Georgia, Iran, or Armenia–the oil must pass through before arriving on Turkish territory. In reality, however, only the Georgian route is currently being seriously considered. President Aliev recently declared that there were several possible routes for the “main” pipeline. “It will be laid through the territory of several countries and I think that the pipeline will definitely cross through the territory of Georgia,” he said.101

U.S.-backed companies are expected to block any move to build the said pipeline across Iran, which their government considers a “rogue” state, while a pipeline through Armenia will not be viable until the future status of Mountainous Karabagh is agreed upon and peace is established between Armenians and Azerbaijanis. Indeed, when on the 1st of May, 1997, President Aliev said at a briefing

20 for foreign journalists in Baku that the building of an oil pipeline through Armenia “could be considered” if Yerevan agreed to return the Azerbaijani territories captured by Armenian troops in recent years,102 official Armenian spokesmen were quick to respond that this proposal was unacceptable. Armenian Foreign Ministry spokesman Arsen Gasparian explained that for Armenia the so-called “occupied territories” issue and the oil pipeline were not interrelated, making the discussion futile. He added, however, that from the economic point of view, “it has been evident to all that the most profitable route for the pipeline is through Armenia.” Armenia considers that a pipeline via its territory will promote integration in the region and even help resolve the Karabagh conflict, said Gasparian, but the two issues should not be connected.103 Moreover, it should not be forgotten that a similar package deal promoted in 1995 and 1996 by Roger Tamraz, a Lebanese-born naturalized U.S. citizen and controversial international oil man, fell through because the governments of both Armenia and Azerbaijan were not ready to make the necessary compromises.

The selection of the Mediterranean route is nevertheless still far from certain. The Turks still expect stiff competition from Russia. Indeed, on April 10, 1997, the Greek Foreign Minister Theodoros Pangalos did not rule out during his visit to Azerbaijan the possibility of Azerbaijani oil eventually being piped to Alexandroupolis via Burgas. Agreements to build such a pipeline, he said, have already been reached between Greece and Russia.104

It is the western route for “early oil” through Georgia, however, which was initially supported by Ankara only as a means to keep hopes alive of shipping the “main oil” through the Mediterranean route, which has surprisingly emerged as yet another strong contender. For international investors, a pipeline through Turkey directly to Ceyhan (either through Georgia or Armenia) is not appealing economically.105 And after its failure to secure Turkey’s involvement in the construction of a Baku-Supsa pipeline for the “early oil,” there are indications that the AIOC may consider boosting the capacity of the planned “early” oil pipeline via Georgia with additional compressors in order to avoid pressure to select a new route for the “main” multi-billion dollar pipeline.106 AIOC President Terry Adams stated in September, 1996, that the pipeline between Baku and Batumi can indeed be upgraded and, in part, constructed to carry between 35-40 million tons of “main oil” annually.

Representatives from Chevron and other American oil companies have also recently paid visits to Georgia to inspect port facilities, pipelines, and rail connections. The expansion of the capacity of the future Baku-Supsa pipeline is also being seriously considered, and the World Bank will provide a $1.3 million loan to finance–along with $100,000 put up by the Georgian International Oil Corporation–a feasibility study for a new pipeline route from Azerbaijan through Georgia. This will be a complete, long-term economic, environmental, and commercial assessment of the Baku-Supsa pipeline and related major terminal and storage facilities on the Black Sea coast. This loan will also provide formal training courses in Georgia and abroad, as well as on-the-job training in international companies, for Georgians who are still largely unfamiliar with the economics and operations of the world oil industry. Moreover, Ukrainian officials who are quietly supported by Georgian President Eduard Shevardnadze are floating the idea that oil piped to Supsa can be carried across the Black Sea by ship to Odessa, then placed into a new pipeline to be constructed from south to north across Ukraine which will connect with the Druzhba pipeline that carries oil directly to Europe. This project will cost an estimated $900 million–half of which will go toward building the pipeline and half toward constructing an oil terminal at Odessa–but it will avoid the shipping problem with the Bosphorus and route the oil through a country with low political risk. It will also free Ukraine from its dependence on oil imports from Russia. Turkish officials fear that the expansion of the Georgian

21 route, together with the Baku-Novorossiisk link, may yet result in the collapse of the Baku-Ceyhan project.107

Finally, there is still the remote possibility of transporting Caspian oil through Afghanistan to the ports of Pakistan or India, yet for this to happen peace must first be restored in that war-torn country. The Russian media have indeed alleged that Washington, looking to pave the way for a southern pipeline route, supported the drive of the Taliban faction in the Afghan civil war to take the country’s capital, Kabul, in the summer of 1996.108

Controversy over Status of the Caspian Continues

Problems arising from the delay in shipping the “early oil” through the northern route, the slow pace of upgrading the western pipeline, and difficulties in reaching a decision for an acceptable route for the “main” oil pipeline are not the only issues confronting the Azerbaijani government at present. The controversy over the status of the Caspian and the consequent fate of its oil deposits have not yet been resolved either, and a special working group with representatives of the five littoral countries has so far failed to draft a mutually acceptable convention on the legal status of the Caspian.109

At a meeting of Caspian states in November, 1996, Russia proposed that as a possible compromise to the disagreement whether the Caspian was a sea or a lake, each littoral country should have exclusive rights to any oil or gas within 72 km of territorial waters, and such zones should be calculated from the appropriate coasts. The remaining central sector of the Caspian should then be used jointly by the five coastal nations. Azerbaijan should be allowed, however, to enjoy “pinpoint jurisdiction” over the fields it has already started to develop outside these limits. That formula proved acceptable to both Iran and Turkmenistan while Kazakhstan saw scope for different arrangements for mineral, fishing, and other rights–a response Russia was quick to interpret as qualified support for Azerbaijan. Baku, however, understandably rejected the offered compromise.110

Moreover, at the end of January, 1997, Turkmenistan and Azerbaijan clashed separately over who owns oil under the Caspian Sea. Turkmenistan said that the Azeri oil field and part of the Chirag field were located in its territorial waters and that it would be “incorrect” for Azerbaijan to forge ahead with drilling plans until the Caspian’s status was defined. Turkmen leaders suggested that until that issue was resolved, the two countries should be guided by existing agreements signed between Iran and the former USSR in 1921 and 1940. Turkmenistan has since followed up on this claim by establishing a state commission that would organize a tender for oil exploration rights in Turkmenistan’s sector of the Caspian with assistance from the European Union’s program of Technical Assistance to the Commonwealth of Independent States. Azerbaijani government sources reject these Turkmen claims, saying that their own claims date back to 1970, and current maps show that the oil fields that Turkmenistan now claims as its are actually located in the Azerbaijani sector.111 “Azeri is in the Azerbaijani sector, the borders of which were defined by the Ministry of Oil and Gas of the former Soviet Union,” said Natiq Aliyev, adding that the western companies had “studied this issue in detail and would never have signed the contract if there had been any doubt” as regards the status of the three oil fields. Moreover, a statement issued by Azerbaijan’s Foreign Ministry said the following: “Methods of defining the economic border clearly show that the Azeri and Chirag oil structures lie completely within the Azeri sector of the Caspian Sea.”112 Baku acknowledged, however, that some fields seemed to overlap recognized borders, and its Foreign Ministry officially proposed joint

22 efforts to resolve the dispute with Turkmenistan: bilateral talks on joint exploration and development of the fields, and a joint commission on clarifying disputes over sea borders.113

Nevertheless, Azerbaijanis still see a silver lining in Turkmenistan’s claim to the Azeri and Chirag oil fields. Natiq Aliyev has pointed out that by claiming that Azeri belonged in the Turkmen sector of the Caspian, Ashgabat is indirectly supporting Baku’s view that the Caspian should be divided into national sectors among the five bordering states. The Turkmen President Saparmurad Niyazov has indeed since then joined Kazakh President Nursultan Nazarbayev in declaring that the Caspian should be temporarily divided into national sectors to avoid conflict while the sea’s legal status is being defined.114 Some Russian analysts have pointed out that Ashgabat committed a tactical blunder by making its claim to the Azeri and Chirag fields, as such a move could ultimately serve to recognize the Caspian’s sectoral division. Russian Foreign Ministry spokesman Gennadiy Tarasov said that Moscow did not accept the Turkmen claim and continued to view the Caspian Sea as the common property of the five littoral states. Tarasov also reiterated Russia’s view that a temporary legal mechanism legitimizing offshore activity should be put into effect until the sea’s legal status is determined. Meanwhile, at least one Russian newspaper has claimed that if the five littoral states fail to reach agreement on how to divide the Caspian into five sectors, the issue should then be tackled by an international court of arbitration.115

The western oil company representatives naturally prefer a territorial division of the Caspian Sea by its surrounding nations, as supported by Azerbaijan, rather than the “condominium” ownership suggested by Russia, for among its other disadvantages the Russian plan implies a greater Iranian presence in future business deals.

Other Oil Deals Signed by Azerbaijan

The persisting problems with the “main” pipeline and the status of the Caspian have not deterred Azerbaijan from signing additional agreements with foreign companies to exploit other oil deposits not covered by the “Contract of the Century.”

A 25-year exploration, development, and production sharing deal estimated at $1.8 billion was signed on November 10, 1995, involving the Karabagh offshore oil field. LUKoil (12.5%), Pennzoil (30%), Agip Azerbaijan (5%), LUKAGIP, a subsidiary of LUKoil and Agip, where both companies hold equal stakes (45%), and SOCAR (7.5%) are the shareholders in the Caspian International Petroleum Company (CIPCO), the joint operating company for the exploration, development, and production sharing agreement of this prospective structure that is presided over by James Tilley of Pennzoil. The Karabagh field is approximately 50 km offshore and 20 km north of the Azeri, Chirag, and deep-water Guneshli fields. Water depths vary from 170 to 200 meters and the main target is located at a depth of 3,340 to 3,640 meters below sea level. Although the Karabagh oil field has been identified by geophysical explorations, no wells as yet have been drilled to confirm the existence or the actual size of any hydrocarbon reservoir. It is considered, however, to be one of Azerbaijan’s most promising fields with oil reserves that can well equal or even exceed 130 million tons. It is scheduled to begin producing oil in 2003 and quickly reach production at a rate of 200,000 b/d. The Azerbaijani parliament ratified this agreement on February 14, 1996.116 CIPCO began drilling its first exploratory well in early August, 1997.

Azerbaijan and a consortium of foreign companies signed a third deal for $4 billion on June 4, 1996, for the development and exploration of the Shah-Deniz offshore field. It covers an area of 860 square

23 kilometers, 70 km southeast of Baku in a water depth of 100 to 500 meters. Its reserves are estimated to contain about 50-100 billion cubic meters of natural gas and 250-500 million tons of oil. The daily yield is expected to be 50,000 tons of oil and 7.5 million cubic meters of gas. BP, the operator for exploration and production, and Statoil each have a 25.5% share in this project; France’s Elf Aquitaine, SOCAR, LUKoil, and Iran’s Oil Industries, Engineering, and Construction (OIEC is a subsidiary of the National Iranian Oil Company) all hold a 10% stake. TPAO holds the remaining 9% stake.117 The contract was ratified by the Azerbaijani parliament on October 4, 1996.

A fourth major deal for $2 billion was signed on December 14, 1996, with a consortium of five international oil companies to develop the Dan Ulduzu and Ashrafi offshore oil and gas fields. The production sharing agreement will last 25 years, the first three years of which will involve the exploration of an area covering 453 square kilometers with water depths ranging from 75 to 200 meters and located in the Caspian approximately 50 km off the Absheron peninsula. These fields are also found in a section of the Caspian which has not been greatly explored, but they are estimated to contain reserves of 1 billion barrels of oil and 65 billion cubic meters of gas. Amoco has a 30% stake in the project; SOCAR and Itochu Oil Exploration (Japan), 20% each; Unocal, 25.5%; and Delta Nimir, 4.5%. Moreover, since the two fields in question are adjacent to the Karabagh deposit, the present contract can in the future be merged with the Karabagh one if this were to be deemed commercially viable, thus giving LUKoil an indirect stake in this deal as well. In the meantime, however, North Absheron Operating Company will operate this contract, which provides for the start of oil production in 2003. Annual oil output is expected to reach 7 million tons by 2007. Under the agreement foreign companies will finance SOCAR’s share during the exploration period and will pay the government of Azerbaijan a signing bonus of $75 million upon successful completion of various phases of the project. Azerbaijan’s parliament ratified this contract on February 25, 1997, by a vote of 87 to 4.118

Finally, during a visit to France by President Aliev on January 13, 1997, French oil companies Elf Aquitaine and Total SA signed a fifth, 30-year deal with SOCAR to develop the 350 billion barrel offshore Lenkoran-Talysh Deniz fields (included in this deal is an initial exploration period of 3-5 years). The concession, estimated at $1.5 billion, covers roughly an area of 420 square kilometers, and is situated about 300 km from Baku. Elf Aquitaine will operate the consortium; it controls 40% of the shares. In May, 1997, Iran’s OIEC acquired a 10% stake in the consortium, and the German company Deminex and Belgium’s Petrofina are reportedly still negotiating for 10% and 5% of the remaining undistributed shares. SOCAR retains a 25% interest, while Total SA has 10%. Estimates of the size of the deposit range from 50 to 100 million tons of oil. Here again the foreign companies will finance Azerbaijan’s share.119 Azerbaijan will also receive a bonus of $10 million upon ratification of the contract by its parliament, $2.2 million for each 10 million barrels of confirmed reserves, and an additional $10 million at the start of industrial development of the field, which is scheduled for 2005. This deal was ratified by Azerbaijan’s parliament on June 13, 1997.

Azerbaijan thus expects to receive around $18 billion in foreign investment from the contracts it has heretofore signed with foreign oil companies. And there are still other projected deals that are currently being discussed. Exxon Azerbaijan Limited, for example, which is an affiliate of the Exxon Corporation, signed a memorandum of understanding with SOCAR on June 6, 1996, granting the former exclusive rights to negotiate the terms of exploration, development, and production sharing agreements covering the three deep-water D-3, D-9, and D-38 Caspian offshore oil fields. These fields, each with estimated reserves of at least 50 million tons, were selected by Exxon Azerbaijan after completing joint technical studies with SOCAR. The exploration blocks cover an area of about 800 square kilometers and are located 80-120 km

24 south of Baku in water over 500 meters deep. Drilling will be required, however, to confirm the presence of any hydrocarbons at a level of over 4,500 meters below the surface.120

A group of Japanese firms–including Mitsubishi Oil, IMPEX, and JAPEX–signed a memorandum of understanding with SOCAR on March 15, 1997, which allows the firms to carry out further exploration on the three Yanan-Tava, Atashgah, and Mugandeniz offshore fields in the south Caspian. The Japan National Oil Corporation will act as a facilitator and insure risks undertaken by the other three companies in the project. The fields, covering an area of about 500 square kilometers, begin 30 to 40 km offshore. Water depths range between 100 and 120 meters. Although it is simply too early to say anything about the likely reserves or how much money will need to be invested without more sophisticated exploratory work, at least one SOCAR official has gone on record describing these three fields as “some of our most promising.” A formal production sharing deal to this effect is expected to be signed with SOCAR sometime in 1997.121

On May 28, 1997, SOCAR signed a preliminary agreement with LUKoil on exploring the Yalama deposit off Daghestan. Additionally, Chevron and Mobil are negotiating with SOCAR on the development of the Z. Tagiyev and Arazdashi offshore structures, which are estimated to hold 117 million tons of oil, 400 million cubic meters of gas and 30 million tons of gas condensate. Mobil is interested in the Oguz and D-30 offshore structures. Unocal wants to get involved in the July field located northeast of the Absheron archipelago. Conoco will finance the rehabilitation of the shallow- water area of the Guneshli field, which contains 80-115 million tons of recoverable oil residue. Agip is seeking to rehabilitate the Palchig-Tepe offshore field, which after 30 years of production is still estimated to contain about 10 million tons of recoverable oil. Moreover, SOCAR is also negotiating a number of onshore oil extraction joint ventures with foreign oil companies. Ramco has a 49% stake in a project to develop the Muradkhanly field, while the Bibi-Heybat field may be rehabilitated with assistance from the World Bank or in a partnership with LUKoil.

The important question of selecting export routes for these oil deals has not yet been clarified. It is assumed, however, that the oil extracted under these deals will be exported through the same route(s) that will be used for the “main oil” from the Azeri, Chirag, and Guneshli fields.

To support development of these major projects, SOCAR is also emphasizing redevelopment of its oil equipment and oil service industries. It has a joint venture with McDermott called MacShelf which specializes in the construction of deep-water platforms. Other projects include construction of underwater pipelines and the reconstruction and retrofitting of ships for use in the drilling and laying of underwater pipelines.

Is Oil a Curse or a Blessing for Azerbaijan?

Azerbaijani leaders have expressed hope that the extraction and eventual export of oil to western markets will help their country overcome the economic crisis it now faces after the collapse of the USSR–and even potentially make its tiny population among the five wealthiest in the world.122

While it may take a little longer for material benefits from these foreign investments to trickle down to the population, the government of Heidar Aliev meanwhile seeks to cash in on the more immediate benefits, especially with regard to finding a solution favorable to Azerbaijan in the latter’s dispute with the

25 Armenians over the future status of Mountainous Karabagh. During his official visit to France in January, 1997, Aliev frankly stated that the western countries currently engaged in the large energy deals in Azerbaijan must use their power to put pressure on the Armenian side in the peace negotiations. Armenians are deeply concerned over the Azerbaijani attempt to link a resolution of the Karabagh conflict with the ongoing multilateral oil negotiations. In January, 1997, Dr. Yuri Barseghov, a Moscow-based specialist in international law, said, “There is hardly any state in the world to which Azerbaijan did not promise oil in exchange for the assistance in the Karabakh problem. The last one was Finland [which was then the chairman of the Minsk group set up by the Organization for Security and Cooperation in Europe (OSCE) to find a negotiated solution to the Karabagh problem]. On the eve of the final stage of negotiations preceding the Lisbon summit [of the OSCE, held in December, 1996], the foreign minister of Azerbaijan visited Finland and suggested that Finland take part in the extraction of Caspian oil, and judging by everything, Finland did not reject the proposal. The next day, when Armenian-Azerbaijani negotiations went on in Helsinki, [the] co-chairman of the OSCE Minsk Group proposed a reconciliation formula suggesting Karabakh’s remaining within Azerbaijan.”123

Armenians are–for now at least–resisting all kinds of pressure to agree to any solution that will endorse Mountainous Karabagh’s becoming an integral part of Azerbaijan. Any negotiated outcome of this conflict may be months, if not years, away. Armenians are afraid, however, that the Azerbaijani government may already be in a more favorable situation to succeed in its current effort–in cooperation with executives of large oil companies and former U.S. officials–to remove existing restrictions on U.S. aid to Azerbaijan.

In October, 1992, the U.S. Congress passed the Freedom Support Act to facilitate the delivery of economic and humanitarian aid to twelve former republics of the USSR (barring the three Baltic states), hoping that this kind of assistance would help stabilize democratic forms of government in those newly independent states and foster their economic growth. The Armenians were in a severely disadvantaged position on the battlefield in and around Mountainous Karabagh at the time, and Armenian-American organizations supported Congress in its addition of Section 907, which said the following: “United States assistance under this or any other act ... may not be provided to the government of Azerbaijan until the President determines, and so reports to the Congress, that the government of Azerbaijan is taking demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Mountainous Karabagh.”124

Section 907 does not impede U.S. government assistance provided through non-governmental and relief organizations, and since 1992 the United States has sent over $100 million in humanitarian aid through international and private organizations such as the International Red Cross and Save the Children in order to assist the Azerbaijani refugees made homeless as a result of the Mountainous Karabagh conflict. None of this aid has reached the Armenians of Mountainous Karabagh, which the American government continues to regard as a part of Azerbaijan. Moreover, American oil companies are not barred under this congressional act from pumping millions of dollars into the Azerbaijani treasury. The law still hampers the further development of Azerbaijan’s economic relations with the United States, however, for American government financing mechanisms such as the Export-Import Bank and the Overseas Private Investment Corporation, which are available for investors in other former Soviet republics, cannot be used in Azerbaijan. The administrations of presidents George Bush and Bill Clinton both have opposed this restriction and have repeatedly asked Congress to repeal the law, yet have met with strong congressional and Armenian-American community resistance to lifting the restriction. Both presidents have nevertheless refrained from exercising the tremendous power that the U.S. Constitution bestows on the executive branch of government–a veto or a waiver of Section 907–thus inviting harsh criticism from pro-Azerbaijani circles.

26 Azerbaijan now hopes that American oil companies investing heavily in the Caspian region will use their influence to alter the balance in Congress and help lift the government-to-government humanitarian and economic aid ban currently in effect. Former U.S. Secretary of Defense Dick Cheney, former U.S. Assistant Secretaries of Defense Richard Perle and Ashton Carter, and Democratic Senator Robert Byrd teamed up, for example, during a well-attended daylong conference in Washington, DC, which was entitled “Azerbaijan: From Communism to Democracy, Growth with Oil.” The conference was held on February 18, 1997, and was attended by a broad range of former Cabinet and Administration officials, former and current U.S. ambassadors, and major oil company chief executive officers advocating the repeal of the ban. The conference was sponsored by the United States-Azerbaijan Chamber of Commerce, headed by Amoco Eurasia Petroleum Company Chairman T. Don Stacy and R. V. Investment Group President Reza Vaziri. Its board of trustees includes Richard Perle, former congressmen Greg Laughlin and Charlie Wilson, as well as, among others, the presidents of Occidental Oil and Gas and Chevron Overseas Petroleum.125 Cheney, who is now the president and chief executive officer of Haliburn Energy Services, a Dallas-based company actively involved in western efforts to explore and develop Caspian sea energy resources, said that U.S. congressional policy on Section 907 was “seriously misguided” and based solely on domestic American political issues.126

Indeed, the fiscal year 1996 U.S. foreign aid bill had included language weakening the restriction by slipping in a provision that would have allowed direct humanitarian aid to Azerbaijan if President Clinton had chosen to waive the law. SOCAR Vice President for Foreign Economic Relations Ilham Aliev (the son of Azerbaijan’s president) is on record that this ruling “was mostly due to the assistance of American oil companies.”127 Yet Clinton preferred not to waive the law, despite a reported last-minute attempt by T. Don Stacy, who made several requests to meet with the President and finally managed to get invited to the White House on August 6, 1996, where he had the floor for a few minutes to make his pitch for a change in U.S. policy. Clinton reportedly astonished those present by engaging Stacy in an extensive discussion of Azerbaijan, an issue that most other guests thought was very obscure. In the end, however, Stacy failed to persuade Clinton to change his mind.

Azerbaijan has also recently begun using the bait of oil concessions in its attempts to pull the Russian government away from its perceived bias towards Armenia. Azerbaijani leaders hope that the large oil companies in Russia and politicians lobbying for Russia’s fuel and energy complex will gradually persuade their government to pay attention more to economic than to geostrategic concerns. Until the recent past, LUKoil–in which the state holds a 39% ownership share–was the only Russian oil company interested in investing in Azerbaijan’s oil sector. With the active participation of its ethnic Azerbaijani president Vahit Alekperov, LUKoil has stakes in three of the five major Caspian exploration deals signed so far, as well as in some other smaller projects. It has also expressed an interest in deepening its presence in the area further, by suggesting that it may spend, inter alia, a further $1.5 billion for a 70% stake in a production- sharing agreement for development of the offshore Inam field with its estimated reserves of 200 million tons of oil. Moreover, another Russian oil company, Rosneft, is preparing–with the stated backing of Prime Minister Chernomyrdin–to sign an accord on “strategic partnership” with SOCAR.128

One recent indication of some progress for Azerbaijan in this field were the allegations made by Aman Tuleyev, the Russian Minister for Cooperation with CIS countries, and Lieutenant-General Lev Rokhlin, the Chairman of the State Duma’s Committee for Defense, that over a three-year period extending from 1994 to 1996 arms worth up to $1 billion were illegally shipped to Armenia from Russia. The shipments, said Rokhlin, included tanks, anti-aircraft missiles, a large quantity of ammunition, and 24 operative tactical missiles for the R-17 system, which alone are sufficient to destroy Baku completely. Russia, he claimed, had not received any sums in return.129 Under repeated Azerbaijani requests, the Kremlin, the State Duma, and

27 the Military Prosecutor’s Office had these sales investigated,130 and the State Control Directorate, which is subordinated to the president, later confirmed that arms shipments had indeed taken place in violation of the procedures stipulated in presidential decrees and other directives, for neither Russian President Boris Yeltsin nor his government had authorized them.131 These charges currently are being trilaterally assessed by an official Russian-Azerbaijani-Armenian commission, which is also considering the issue of Russian, Turkish, and other arms transfers to Azerbaijan.

Rokhlin is indeed known as a vocal supporter of closer ties with Azerbaijan. The allegations mentioned above were made soon after his public demand that Armenia should immediately withdraw its troops from Mountainous Karabagh. Otherwise Russia would lose Azerbaijan as an ally, and that, Rokhlin claimed, would not be good for Russia economically. Rokhlin had also cautioned Armenia that Russia would never declare war on Turkey on its account.132 He also induced members of the Duma’s Defense Committee to adopt a draft resolution which urges Yeltsin to eliminate the Russian military bases in Armenia, their presence no longer deemed important by Rokhlin. These bases, claimed the draft resolution, did not allow operative development of military forces, and they were unable to implement the tasks of front bases in case of military operations. The draft resolution alleged, moreover, that the presence of a Russian base in Armenia turned Moscow into a hostage as a result of Armenia’s policy of maintaining its conflict with Azerbaijan on the future status of Mountainous Karabagh. It asked the president to relate the presence of Russian bases in Armenia with the concrete terms of political resolution of the Karabagh dispute, and to abolish service by local Armenian citizens in the Russian contingents based in Armenia.133

The Russian government has since gone forward and formalized the presence of a Russian military base in Armenia, but the possibility should never be ruled out that the balance may yet shift if more and more Russian businessmen and their proxies increasingly sense and enjoy the taste of oil profits. Still, if there are hopeful signs for the Azerbaijani elite that the country’s oil wealth may somehow facilitate the realization of their foreign policy goals, opponents of the regime are expressing alarm that oil may actually perpetuate the authoritarian nature of President Aliev’s administration and seriously hinder Azerbaijan’s progress towards becoming an open and democratic society.

Although all major political parties in Azerbaijan support economic reform and privatization in this post-Communist era, it is expected that the state will retain a controlling share in enterprises vital to the state interest, including oil. The Council of Ministers currently approves all foreign investments and grants all concessionary agreements on mineral exploration, prospecting, and extraction rights. The President remains the ultimate authority on all major contracts in the country.

Historian Bernard Lewis is, of course, not alone in pointing out that “Oil ... has proved at best a mixed blessing–some might even say a curse–for countries where it is found, in that it has sometimes served as a buttress to tyranny and a barrier to social modernization. It has freed oppressive governments from the need to raise taxes and thereby expose themselves to those pressures that raising taxes engenders; one might even adapt an American slogan for Middle Eastern purposes and say, no representation without taxation. There is worse to come. Western science and technology, which made oil first useful and then necessary, will sooner or later make it obsolete, and those who depend on oil revenues will confront a new reality.”134 Expressed within a particular Azerbaijani context, American journalist Thomas Goltz’s warnings almost echo Lewis’s argument: “Oil is a dirty business. My old professor, Charles Issawi of Princeton, once referred to it as less a blessing than a curse, because of its propensity to make small yet oil-rich nations lazy, corrupt and coveted by their neighbors. With few exceptions it also has the tendency to make those same small nations undemocratic, as a small elite usually takes control of the resources and exploits them for their own ends.”135

28 Indeed, political instability continues in Azerbaijan. Aliev’s political opponents are frequently arrested, charged, and then imprisoned for involvement in some alleged plot to kill the President.136 Foreign intelligence agents, usually those of the Russian Federation, are also frequently accused of involvement in these alleged coup attempts. Human Rights Watch/Helsinki says that about 2,000 people were arrested in the country on charges of terrorist activities and plotting to seize power from October, 1994 to January, 1997 alone, and that many of those arrested on political grounds have suffered torture. Some have even been tortured to death.137

Azerbaijan is thus still in the midst of a period of uncertainty. On the one hand, hopes exist that the country will possess a prosperous future with a relatively high standard of living, and that its security and territorial integrity will be guaranteed by stronger countries interested in keeping its oil flowing to external markets. On the other hand, there are fears that the oil wealth will not ultimately trickle down to the majority of its people, instead encouraging its political elite to become greedy and undemocratic. This, it is feared, will pave the way for continual intervention in its internal affairs by larger neighbors who might attempt to lure various factions within the country’s elite and fuel their disagreements with the aim of establishing some sort of indirect control over the country’s oil wealth and strategic location. Predicting which way Azerbaijan ultimately will go is beyond the scope of this paper. Making predictions is always dangerous, particularly in cases as complex as Azerbaijan’s, where a variety of factors, both economic and political, plus a multitude of actors, both from the region and outside, are involved. It is beyond doubt, nevertheless, that the outcome of this struggle–tottering between prosperity, stability and turmoil on one hand, and between democracy and authoritarianism on the other–will seriously affect the future of the Transcaucasus as a whole.

POSTSCRIPT

During the three months since this article was written, interest in Azerbaijani oil has grown even further in the United States. Government circles in Washington have openly adopted what they call a “far-reaching strategy” to expand rapidly commercial relations with Baku, to strengthen the latter’s independence from Moscow, to limit the influence of Iran in the Caucasus, and to settle regional conflicts in order to accelerate the development of oil deposits at the bottom of the Caspian. Republican Senator Sam Brownback from Kansas, who is the chairman of the Senate Foreign Relations Near East subcommittee, former national security advisers Brent Scowcroft and Zbigniew Brzezinski, former White House chief of staff John N. Sununu, former Secretary of State James A. Baker III, former Treasury Secretary Lloyd Bentsen, former Democratic Congressman Charles Wilson from Texas, and former Assistant Secretary of Defense Richard L. Armitage all have joined the chorus urging a change in U.S. policy and calling for more active engagement in the former Soviet republics of the Caucasus and Central Asia generally and in Azerbaijan particularly.138

President Clinton has responded favorably to these requests and accorded President Aliev what amounted to red-carpet treatment during his first official state visit to the American capital at the beginning of August. On the 1st of August, the two heads of state signed a Joint Statement on U.S.-Azerbaijani Relations and a Bilateral Investment Treaty. The Joint Statement underlined their commitment to work for a closer partnership, noting their strong interest in achieving peace in Mountainous Karabagh; their agreement on the need for a strengthened commitment by Azerbaijan to political pluralism, economic reform, and rule of law; the importance they attached to the expanding commercial relationship between the two countries, particularly in the development of Caspian energy resources; their desire to see Azerbaijan’s continued

29 integration into the global economy as well as emerging European security structures; and their support for closer contacts among the peoples of the two countries.

The Bilateral Investment Treaty guarantees the right to invest in both countries on terms no less favorable than those accorded to domestic or third-country investors in most sectors. It also guarantees the free transfer of capital, profits, and royalties, freedom from performance requirements that distort trade and investment flows, access to international arbitration, and internationally recognized standards for expropriation and compensation. It is hoped that the treaty will further strengthen economic links between the two countries, as well as create a stronger basis for trade and an open investment climate.

U.S. Energy Secretary Federico Pena and Azerbaijan’s Foreign Minister Hassan Hassanov also agreed during this visit to strengthen their cooperation on energy development issues and environmental protection. Their agreement entails regular, bilateral meetings on energy issues which will address regional cooperation, development of legal and regulatory frameworks, and commercial and investment issues. Azerbaijan will keep the United States abreast of news of offshore and onshore oil and gas development, privatization of the electric power sector, and improving efficiency in the energy sector.

Finally, the Export-Import Bank of the United States and Azerbaijani Finance Minister Fikret Yusifov signed a project investment agreement laying the foundation for possible financing of U.S. exports to Azerbaijan. This agreement will enable the latter to obtain capital goods to develop its infrastructure, industry, and oil reserves in particular.139

During this visit, Aliev also signed, on behalf of SOCAR, three new contracts with U.S. energy firms Exxon, Chevron, and Mobil to develop Caspian oil fields. The deal with Exxon concerns the Nakhchivan exploration area, formerly called the D-3 Prospect, in the southern sector of the Caspian. The field may hold at least 100 million tons of crude. Exxon and SOCAR already had a memorandum of understanding on the offshore oil fields D-3, D-9, and D-38. The production-sharing agreement with Chevron was for development of the offshore Zeynalabdin Tagiyev field, now called the Absheron Prospects, with possible recoverable reserves of 115 million tons of crude and 420 billion cubic meters of natural gas. Mobil will develop the offshore Oguz Prospect, 70-80 km southeast of the capital Baku. SOCAR estimates that Oguz may contain at least 40 million tons of crude and 20 billion cubic meters of natural gas. Azerbaijani oil officials said the three deals were valued together at some $10 billion.140 The signing ceremony took place in the White House’s Roosevelt Room on August 1, 1997, with U.S. Vice President Al Gore in attendance. Later, during a stopover in Chicago, Aliev signed, again on behalf of SOCAR, an “exclusive negotiations” agreement with Amoco to jointly explore and develop the offshore Inam Prospect, about 120 miles south of Baku.141

Aliev also used his visit to the United States to call on Congress to repeal Section 907 of the Freedom Support Act of 1992, enlisting in his quest the help of the oil companies, which seek government-backed loans for drilling and pipeline ventures in Azerbaijan. A provision sponsored by Democratic Senator Robert Byrd of West Virginia, and passed in July, 1997, in the Senate version of the foreign operations bill for fiscal year 1998, had already exempted the Export-Import Bank, the Overseas Private Investment Corporation, and the Trade and Development Agency from compliance with current economic sanctions on Azerbaijan. The House foreign aid bill, however, had maintained all economic sanctions following a strong campaign by ethnic Armenian lobbying groups in the country.142 In the White House talks, President Clinton pledged to continue to call on Congress to repeal the embargo and assured Aliev that a change to the ban would be made soon.143 The White House repeated, however, that the President

30 would not issue an executive order lifting the aid ban and preferred to work with Congress to achieve this goal. A final decision will be made in this regard in September. Meanwhile, in the absence of any repeal, some Congressional leaders such as Edward Porter, a Republican representative from Illinois, are contesting the legality of the above-mentioned Bilateral Investment Treaty, which was signed, they say, in violation of Section 907.

Section 907 is not, of course, the only obstacle which Azerbaijan’s oil industry is facing these days. There has been little progress in recent months on the upgrading of the northern pipeline to carry some of the “early oil” to Novorossiisk, the decision to choose the route for the “main” oil pipeline, and an agreement on the final status of the Caspian.

Although the decisions to begin extracting oil from the AIOC concession area and to commence exporting it via the northern pipeline on the 1st of October remain technically in force, Russian federal authorities and Chechen separatists are, at the time of writing, as far apart as ever on the terms under which “early” oil will be carried across the Chechen stretch of this pipeline. Prime Minister Chernomyrdin and Chechen President Maskhadov signed a “memorandum” in Sochi on June 13, 1997, stipulating the conclusion of a trilateral agreement between the Russian Fuel and Energy Ministry, YuNKO, and AIOC on the transit via the northern route of oil from three offshore Caspian deposits of the AIOC concession area.144 The Russian First Deputy Prime Minister and Minister for Fuel and Energy Boris Nemtsov followed up by signing a five-point agreement in Baku on the 11th of July with the heads of YuNKO and SOCAR. Russia’s Fuel and Energy Ministry and YuNKO signed their own deal in Grozny the following day to get the northern route into a working state on time. Russia undertook to finance repairs to the pipeline in return for Chechen guarantees for the safety of Russian workers engaged in repair work. Transneft said then that $2 million and only 20 days were needed to refurbish and commission the Chechen link.145 Chechnya thus dropped its earlier insistence that it should sign its own separate oil deal with AIOC. No further progress has since been possible, however, because of Russia’s rejection of the high tariffs demanded by Chechnya. Under the Azerbaijani-Russian agreement of January, 1996, Russia will receive a $15.67 transit fee per metric ton of oil carried through the pipeline. Under the agreement of July 11, 1997, Chechnya’s share was set at $4-5, but Russian Energy Minister Sergei Kirienko now says that the Chechens are demanding $6. Moreover, Khozh-Ahmed Yarikhanov has accused Russian agencies of preventing YuNKO from acquiring equipment needed to repair the Chechen sector of the northern pipeline. He says that the Russian Central Bank has failed to unfreeze the accounts of YuNKO’s subsidiaries in Russian banks, and that under those circumstances YuNKO cannot honor the commitments under the agreement on the pumping of Caspian oil. Kirienko is even threatening to construct an alternative pipeline through Daghestan, which will bypass Chechen territory. He says that such a pipeline will take 18-24 months to build at an estimated cost of $250 million, but that the final decision on whether it should be built will be taken by the Russian government.146

Georgia will probably gain most if this Russian-Chechen dispute is not solved soon. “Early oil” extracted beginning this month will then probably be exported to the Black Sea coast via rail across Georgian territory until the western pipeline becomes operational at the end of 1998. The chances of eventually having the “main” oil pipeline constructed across Georgia will also improve substantially in this case. Even Georgian experts admit, however, that there is still a lot of work to be done to develop the much heralded Europe-Caucasus-Asia Transport Corridor. The Poti sea port is still the most expensive on the Black Sea coast and its services are far from being competitive.147 The Iranian government, which had signed a cargo- transit contract with Ukraine and Georgia in 1996, for example, now intends to transit its goods to Europe through Turkey because of the lower transportation fees and better-quality roads in Turkey. It is feared that if Iran carries out its threat, Ukraine may also give up the Poti-Illichevsk ferry.148

31 John Hollis, the first vice president of AIOC, now says that the final choice for the route of the “main” oil pipeline will only be made in the third quarter of 1998, i.e., over a year behind schedule, but the United States has already come forward in support of multiple routes out of the Caspian region. Washington claims that this solution will be consistent with its strategy to diversify energy supplies throughout the world. AIOC will soon make recommendations to the Azerbaijani government, but the latter will have the final say over the choice, and President Aliev seems confident that the proposed Baku-Ceyhan route will be at least one of those chosen for the “main” pipeline.149 He even went on to sign on June 10, 1997, a deal with President Nursultan Nazarbayev of Kazakhstan to build a 2,575 km oil pipeline that will run from the Kazakh oil fields on the eastern shore of the Caspian Sea via Turkmenistan and along the floor of the Caspian to Baku. From there, this pipeline will run overland across Georgia and Turkey to the Mediterranean, thus giving Kazakhstan an alternative to export routes across Russia. It will have an annual capacity of 45-50 million tons. Construction is planned to begin in 2000 and to last three years, at a total cost of $2.5 billion. It remains unclear how this project will be funded, but is expected that the participants in the Kazakhstancaspishelf consortium developing large deposits off Kazakhstan’s Caspian shore will be invited to help raise the required capital.150

In the meantime, Turkish President Suleyman Demirel and Georgian President Eduard Shevardnadze signed a joint declaration in Tbilisi on July 14, 1997, claiming that the Baku-Ceyhan route is technically more feasible than other alternatives and enjoys advantages from economic, strategic, and ecological standpoints.151 Shevardnadze later discussed Georgia’s role in the transportation of Caspian oil with President Clinton in Washington on the 18th of July. The latter reportedly expressed support for routing a major export pipeline from Baku to Ceyhan via Georgia, while other U.S. officials told their guest that part of the oil should be transported to Supsa to be shipped to Ukraine for pumping to Western Europe.152

Other options to carry the “main oil” to western markets should not be discarded, however, at least for the time being, for AIOC Vice President Gregory Rich argued recently that the Baku-Ceyhan line was the most expensive and would be economically disadvantageous to Azerbaijan. He added that the export of Azerbaijan’s oil via Ukraine, although technically feasible, might also be economically disadvantageous since the AIOC planned to sell the oil in question to southern European countries. Rich moreover doubted that either Turkey or Ukraine could afford to pay world prices for domestic consumption of Azerbaijan’s oil.153 Meanwhile, Greek Foreign Minister Theodoros Pangalos has reiterated that his country is still planning the construction of a big pipeline from Novorossiisk to Burgas and then to the Mediterranean,154 while the Pakistani Foreign Minister Gohar Ayub Khan has proposed that part of Azerbaijan’s oil can be exported by a pipeline from Turkmenistan via Afghanistan to Pakistan.155

Finally, the ongoing dispute between the Caspian littoral states over the status of that body of water has been highlighted recently because of the abortive Russian-Azerbaijani deal to exploit the offshore Kyapaz oil field. The Russian oil companies LUKoil and Rosneft initialed in Moscow on the 4th of July a $1 billion preliminary deal with SOCAR to explore and develop the Kyapaz oil field. Russian Deputy Prime Minister Nemtsov had previously discussed this deal with President Aliev during the latter’s first official state visit to Russia since regaining power in Azerbaijan in 1993, and both were later present at the signing ceremony. Kyapaz, located 145 km east of Baku on the border between the Azerbaijani and Turkmen sectors of the Caspian, was estimated to contain oil reserves of over 50 million tons. This act was interpreted, then, as silent acceptance in Moscow of Baku’s interpretation of the Caspian as a sea. LUKoil and Rosneft received 30% and 20% holdings, respectively, in the consortium, while SOCAR retained the remaining 50%.156

The following day, however, the Turkmen Foreign Ministry issued a strong statement disputing Azerbaijan’s ownership of Kyapaz, which Ashgabat calls Serdar. It demanded the immediate annulment of the said

32 agreement and hired a Washington-based law firm, Hogan and Hartson, to establish its claim and clarify the divisions in the Caspian. Ashgabat also reiterated its earlier claims to part of the much larger Chirag (Kaverochkin) field and all of the Azeri (26 Commissars) field already under development by AIOC. It proposed creating a joint Turkmen-Azerbaijani commission to delineate the dividing line between the two countries’ sectors of the Caspian and warned Baku that it might appeal to an international court to adjudicate its rights to these fields.157 A week later, Turkmenistan threatened to take tougher measures to control these disputed areas.158 Ashgabat sent Azerbaijan a further message on the 26th of July on the “inadmissibility of undertaking any practical work” on the Kyapaz and the nearby Chirag oil fields.159

Turkmen President Saparmurad Niyazov was quoted on the 30th of July as saying that Turkmenistan intended to hold a tender in the United States for exploitation of the disputed Kyapaz/Serdar field.160 Russian Vice Premier Valeriy Serov arrived in Ashgabat on the 26th of July in this charged atmosphere. Niyazov told him, in the presence of representatives from LUKoil and Rosneft, that the Kyapaz deal was unacceptable as the oil field belonged to Turkmenistan. He called on President Yeltsin to declare the agreement void. The Russian retreat was surprisingly swift and decisive. Soon after his meeting with Niyazov, Serov described the deal as an “unfortunate misunderstanding” and said that Russia had been under the impression that Turkmenistan and Azerbaijan had settled the question prior to the contract’s signing.161 He conceded that Russia’s position was legally untenable and promised that the contract would be annulled. Russian Foreign Ministry officials also pledged to correct the mistake, and Rosneft pulled out of the deal the next day. The company said it planned to continue work in the Caspian, but on other projects.162 On the 5th of August, the Russian Foreign Ministry issued a statement confirming that Rosneft and LUKoil had withdrawn from the Kyapaz/Serdar contract.163 Finally, Yeltsin met with Niyazov in the Kremlin on the 7th of August, repeating that the agreement on the principles of developing the Kyapaz deposit had been a mistake and had been canceled. He claimed that the agreement “was signed by the companies, bypassing the President and government structures.” He noted that the positions of Russia and Turkmenistan concerning the legal status of the Caspian “are quite close,” and that both countries agreed on the need to expedite the signing by all littoral states of a convention based on international law formalizing the status of the Caspian.164 Azerbaijani leaders have since regretted in public the annulment of the Kyapaz deal, reiterating in the meantime that their claims to Kyapaz are indisputable. They have proposed repeatedly, however, that Azerbaijan and Turkmenistan jointly develop Kyapaz.165

August 1997

33 Notes 1. “Great Britain to Modernize Azeri Oil Industry,” Itar-Tass news agency report from London, as posted on Asbarez- On-Line, http://www.asbarez.com, 28 January 1997. 2. Robert Lyle, “Russia/Azerbaijan: Caspian Sea May Be The Next Great Oilfield,” Radio Free Europe/Radio Liberty (RFE/RL) report from Washington, 19 February 1997. 3. Hugh Pope, “Two Pipeline Projects Vie to Export the Oil Output,” The Wall Street Journal, 25 April 1994. 4. Hooshang Amirahmadi, Oil at the Turn of the Twenty First Century: Interplay of Market Forces and Politics, The Emirates Occasional Papers, No. 5 (Abu Dhabi: The Emirates Center for Strategic Studies and Research, 1996), p. 21; John Roberts, Caspian Pipelines (London: The Royal Institute of International Affairs, 1996), p. 6. 5. Hafiz M. Pashayev, “‘Great Game’ Continues to Threaten Azerbaijan,” The Boston Globe, 24 April 1997; Pope, “Two Pipeline Projects.” 6. Amirahmadi, Oil at the Turn of the Twenty First Century, pp. 9, 17. 7. Ibid., p. 22. 8. “Central Asia Eyes Iran as Route to Export Oil,” Reuters news agency report from Tehran, 18 February 1997. 9. Roberts, Caspian Pipelines, p. 33. 10. Carroll Bogert, “Black Gold, Blue Sea,” Newsweek, May 12, 1997, p. 37. 11. Ronald Grigor Suny, The Baku Commune 1917-1918: Class and Nationality in the Russian Revolution (Princeton, N.J.: Princeton University Press, 1972), p. 3; Emil Agayev, Baku: A Guide (Moscow: Raduga Publishers, 1987), pp. 6, 15; Audrey L. Altstadt, The Azerbaijani Turks: Power and Identity under Russian Rule (Stanford, CA: Hoover Institution Press, 1992), p. 10; Natiq Aliyev, “The History of Oil in Azerbaijan,” Azerbaijan International 2.2 (Spring 1994), p. 22. 12. Suny, Baku Commune, pp. 4-5; Agayev, Baku, p. 21; Altstadt, Azerbaijani Turks, p. 21. 13. Altstadt, Azerbaijani Turks, p. 22; Aliyev, “History,” pp. 22-23. 14. Suny, Baku Commune, pp. 4-6; Agayev, Baku, pp. 22, 107; Altstadt, Azerbaijani Turks, pp. 22, 39; Nasser Sagheb and Masoud Javadi, “Oil: Azerbaijan’s Economic Rebirth,” Azerbaijan International 2.2 (Spring 1994), pp. 12-13; Aliyev, “His- tory,” p. 23. 15. Suny, Baku Commune, pp. 3, 7; Agayev, Baku, p. 22; Pirouz Khanlou, “Baku’s Architecture: A Fusion of East and West,” Azerbaijan International 2.4 (Autumn 1994), p. 21. 16. Altstadt, Azerbaijani Turks, p. 22; Aliyev, “History,” p. 22. 17. Suny, Baku Commune, pp. 5(n), 13, 20; Altstadt, Azerbaijani Turks, pp. 36-37. 18. Suny, Baku Commune, pp. 5-6, 50-51. 19. Ibid., pp. 58, 63; Altstadt, Azerbaijani Turks, p. 75. 20. Suny, Baku Commune, pp. 237-52 passim. 21. Délégation de l’Azerbaidjan à la Conférence de la Paix à Paris, Situation économique et financière de la République de l’Azerbaidjan du Caucase (Paris, 1919); Altstadt, Azerbaijani Turks, p. 113. 22. Agayev, Baku, p. 60; Altstadt, Azerbaijani Turks, pp. 112, 164. 23. Khoshbakht Yusifzade, “The Development of the Oil and Gas Industry in Azerbaijan,” Azerbaijan International 4.2 (Summer 1996), posted on-line at http://www.azer.com/42.folder/42.developmentindustry.html. 24. Agayev, Baku, pp. 28, 31, 33, 147. 25. Anne Kressler, “Trailblazer in Pursuit of Oil: The Re-Opening of Azerbaijan to the West,” Azerbaijan International 2.4 (Autumn 1994), p. 34. 26. Agayev, Baku, pp. 32, 60. 27. Ibid., pp. 30, 158, 172-73. 28. Altstadt, Azerbaijani Turks, p. 152. 29. Fuad Akhundov, Fikrat T. Aliyev and Mikhail Agarunov, “World War II and Azerbaijan,” Azerbaijan International 3.2 (Summer 1995), p. 50. 30. Ibid., pp. 52-55.

34 31. Altstadt, Azerbaijani Turks, p. 208; Guy Chazan, “Western Oil Firms Help Azerbaijan on the Road to Economic Recovery,” AGBU News, Vol. 2, No. 4 (December 1992), p. 5. 32. Chazan, “Western Oil Firms,” pp. 5-6. 33. Ibid., p. 6; Steve LeVine, “The Great Game Revisited,” Financial Times, 7 March 1994; Sagheb and Javadi, “Oil,” p. 12; “The Land on the Crossroads of Europe & Asia,” Time International, No. 9 (February 28, 1994), Special Advertisement Section; Azerbaijan International 2.3 (Summer 1994), p. 20. 34. “Foreign Investment in Azerbaijan Up Five Fold in 1996,” Reuters news agency report from Baku, 21 February 1997. 35. Kressler, “Trailblazer,” pp. 34-35. 36. Thomas Goltz, “Oil and Civil Society Don’t Mix,” WarReport: Bulletin of the Institute for War and Peace Reporting, No. 45 (September 1996), p. 41. 37. Chazan, “Western Oil Firms,” p. 5; Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13; Kressler, “Trailblaz- er,” p. 69. The northern end of this structure, Guneshli shallow water, was already producing approximately 6.5 mil- lion tons of oil a year at the time, i.e., more than half of Azerbaijan’s oil production. 38. Goltz, “Oil and Civil Society,” pp. 41-42. 39. Chazan, “Western Oil Firms,” p. 6. 40. Ibid., pp. 5-6. 41. Sohrab Rob Sobhani, “Denying Aid to Azerbaijan: Putting U.S. Energy Sector at Peril,” Houston Chronicle, 27 Decem- ber 1992, as reprinted in Azerbaijan International 2.1 (June 1993), p. 27. 42. Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13. 43. Chazan, “Western Oil Firms,” p. 6; Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13. This last project delivered its billionth cubic meter in August, 1995, and was providing then some 20% of Azerbaijan’s natural gas sup- ply. Based on recent projections, Azerbaijan should be able to meet all of its demand for natural gas from domestic sources by 2005. 44. Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13. 45. Habib Azarsina, “1993 in Review,” Azerbaijan International 2.1 (Winter 1994) p. 10; LeVine, “The Great Game Revisit- ed.” This assistance continues even after the signing and the ratification of multi-billion oil contracts with SOCAR. For example, the American University of Baku, founded in January, 1995, to train the next generation on new eco- nomic concepts, is funded by the oil companies; see Nora Boustany, “Why Not Try a Baku Sale,” The Washington Post, 14 February 1997. 46. Azarsina, “1993 in Review,” p. 10; Goltz, “Oil and Civil Society,” p. 42. 47. The previously centralized oil industry in Russia had been broken up after 1991 into 16 independent companies; see Peter Rutland, “Oil Privatization Plans,” Open Media Research Institute (OMRI) Daily Digest, No. 42, Part I, 28 Feb- ruary 1997. Of these, LUKoil is the largest. A survey carried out by the U.S. firm Miller & Lents ranked LUKoil–with its estimated oil reserves of 1.5 billion tons–as the first in the world among all private oil firms as regards the size of its proven oil reserves; see Natalia Gurushina, “LUKoil’s Resources are World’s Largest among Private Oil Firms,” OMRI Daily Digest, No. 40, Part I, 26 February 1997. 48. LeVine, “The Great Game Revisited”; Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13. 49. LeVine, “The Great Game Revisited.” 50. Natiq Aliyev, “The Contract: Anticipating the Future,” Azerbaijan International 2.4 (Autumn 1994), p. 25. 51. Azerbaijan International 2.3 (Summer 1994), p. 18; Natiq Aliyev, “The Contract”, p. 25. 52. “Delta Nimir Khazar Ltd. (DNKL): The Consortium’s Newest Member,” Azerbaijan International 2.4 (Autumn 1994), p. 9. 53. Nasser Sagheb and Masoud Javadi, “Azerbaijan’s ‘Contract of the Century’ Finally Signed with Western Oil Consor- tium,” Azerbaijan International 2.4 (Autumn 1994), p. 26. 54. Azerbaijan International 2.3 (Summer 1994), p. 19. 55. Roberts, Caspian Pipelines, pp. 7, 33; Aliyev, “The Contract,” p. 25; Sagheb and Javadi, “Azerbaijan’s Contract of the Century,” p. 26; “Historical Beginnings - The AIOC-Azerbaijan International Operating Company,” Azerbaijan Interna- tional 3.2 (Summer 1995), p. 37.

35 56. Sagheb and Javadi, “Azerbaijan’s Contract of the Century,” p. 29. This division of stakes has undergone some change since the signing of the contract in September, 1994. In early 1995, SOCAR sold half of its 20% share to the American Exxon company and to TPAO. The latter paid SOCAR $70 million for the extra 5% stakes. The following year, Itochu, one of Japan’s leading general trading companies, purchased McDermott’s 2.45% interest in the production sharing agreement for an undisclosed sum. Itochu then went on to purchase an additional 5% stake from Pennzoil’s original 9.8175% share; see “McDermott to Sell Its Interests in Three Caspian Sea Oil Fields to Itochu Corp.,” 12 March 1996, posted on-line at http://www.mcdermott.com/corporate/news/1225.html. After these transactions, the stakes held in the consortium have become divided among its 12 member companies as follows: BP, 17.1267%; Amoco, 17.01%; SOCAR, 10.0%; LUKoil, 10.0%; Unocal, 9.5%; Statoil, 8.563%; Itochu, 7.45%; TPAO, 6.75%; Exxon, 5.0%; Pennzoil, 4.8175%; Ramco, 2.0825%; and Delta-Nimir, 1.7%. According to this existing division of stakes, therefore, SOCAR will get 2.5% of the total profits; BP, 4.28%; Amoco, 4.25%; LUKoil, 2.5%; Pennzoil, 1.2%; Unocal, 2.36%; Statoil, 2.14%; Itochu, 1.86%; Ramco, 0.52%; TPAO, 1.69%; and Delta-Nimir, 0.42%. The Azerbaijani government had originally agreed in late 1994 to sell 5% of SOCAR’s original stake in the consortium to the National Iranian Oil Company. The Unites States government vetoed Iran’s 5% stake, however, and Azerbaijan complied, selling that 5% to TPAO. It is probable that the implication of certain high-level Turkish politicians and security service officers in a coup attempt against Aliev on 17 March 1995 may have induced the Azerbaijani president to placate Ankara and raise its stakes in the consortium; see “Azerbaijani President Postpones Visit to Turkey,” RFE/RL Newsline, Vol. 1, No. 5, Part I, 7 April 1997; “Aliyev Criticizes Ciller on Armenia Policy,” Asbarez-On- Line, 7 May 1997. 57. “Will Azerbaijan Really Benefit from the Consortium Contract,” Azerbaijan International 3.2 (Summer 1995), p. 40. 58. Sagheb and Javadi, “Azerbaijan’s Contract of the Century,” pp. 26-27; “Will Azerbaijan Really Benefit,” p. 40. 59. Charles H. Fairbanks and Elshan Alekberov, “Azerbaijan and the Ominous Rumblings Over Russia’s ‘Near Abroad,’” Azerbaijan International 2.4 (Autumn 1994), p. 10. 60. Sagheb and Javadi, “Azerbaijan’s Contract of the Century,” p. 28. 61. Ibid. 62. Khoshbakht Yusifzade, “The Status of the Caspian,” Azerbaijan International 2.4 (Autumn 1994), p. 30. 63. “Iranian Parliamentary Speaker in Moscow,” RFE/RL Newsline, Vol. 1, No. 9, Part I, 11 April 1997. 64 “Iranian leader blames U.S. for stoking Caspian dispute,” Reuters news agency report from Moscow, 13 April 1997. Incidentally, a Baku court convicted four leaders of the Islamic Party to 10-11 years of imprisonment a few days later, following a seven-week trial. The defendants had been accused of spying for Iran with an aim of strengthening anti- western propaganda and carrying out protests against the participation of American and western oil companies in projects in Azerbaijan; see “Azeri Court Convicts Five on Spying for Iran,” Reuters news agency report from Baku, 14 April 1997; “Baku Court Sentences Islamists,” RFE/RL Newsline, Vol. 1, No. 11, Part I, 15 April 1997. 65. Fairbanks and Alekberov, “Azerbaijan and the Ominous Rumblings,” pp. 10-13; “Russia Extradites Azeri Ex-Premier to Azerbaijan,” Reuters news agency report from Baku, 27 March 1997; “Russia-Azerbaijan: Russia Extradites Ex-Azeri Premier Accused of Coup Plot,” Agence France Press (AFP) news agency report from Moscow, 27 March 1997; “Former Azerbaijani Prime Minister Charged,” RFE/RL Newsline, Vol. 1, No. 18, Part I, 24 April 1997. There are some observers, however, who still consider that “the September, 1994 episode was largely stage-managed by the Azerbaijan president himself in order to bolster a faltering position”; see, for example, Roberts, Caspian Pipelines, p. 16. 66. “Historical Beginnings,” p. 34; Betty Blair, “Azerbaijan International Operating Company: Two Years and Moving For- ward: Interview with President Terry Adams,” Azerbaijan International 4.4 (Winter 1996), posted on-line at http://www.azer.com/44.folder/44.aioc.html. 67. Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 14. A similar swap agreement exists between Iran and Kazakhstan, whereby Kazakhstan will deliver 2 to 6 million tons of oil to the Tehran and Tabriz refineries in north- ern Iran over a 10-year period, and, in return, Iran will give Kazakhstan the same amount of oil, ready for export from a Gulf port. This swap deal allows Almaty to sell oil to world markets without paying to pump it through Rus- sia, which still controls the pipeline routes out of Kazakhstan; see “Central Asia Eyes Iran as Route to Export Oil,” Reuters news agency report from Tehran, 18 February 1997. 68. “Should The U.S. Be Banning Assistance to Azerbaijan?,” Post-Soviet Business Monitor 1.3 (April 7, 1993), as reprinted in Azerbaijan International 1.2 (June 1993), p. 26; Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” pp. 13-14. 69. LeVine, “The Great Game Revisited.”

36 70. Azarsina, “1993 in Review,” p. 10; Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” pp. 14-15; Elizabeth Fuller, “The ‘Near Abroad’: Influence and Oil in Russian Diplomacy,” Transition, 28 April 1995, p. 34. 71. “Historical Beginnings,” p. 37. There already exists, for example, a separate Caspian Pipeline Consortium (CPC), which is scheduled to complete by September, 1999, the construction of a new 1,500 km pipeline with an annual throughput capacity of 67 million tons from Novorossiisk through the Russian city of Komsomolsk to Kazakhstan’s Tengiz oil field. The CPC plans to transport about 560,000 b/d through the pipeline in the early stages, building volumes gradually to 1.34 million b/d by 2014. According to an agreement signed in Moscow on 16 May 1997, Russia owns 24% of the shares in CPC; Kazakhstan, 19%; Oman, 7%; Chevron Oil, 15%; Mobil Oil, 7.5%; Oryx, 1.75%; the Russian-American LUKArco joint venture, 12.5%; the Russian-British company Rosneft-Shell, 7.5%; British Gas and Agip, 2% each; and Munaigaz of Kazakhstan, 1.75%. Amoco will finance Kazakhstan’s share as part of a deal permitting the company to transport 3 mil- lion tons of oil via the planned pipeline. While the project does not involve oil production on Russian soil, Russia is set to earn huge transport fees. Overall, it may bring as much as $23 billion to Russia over a 40-year period. But construc- tion of this pipeline may fall behind schedule if talks on tariffs with four Russian regions through which the pipeline will pass are not completed soon; see Lowell Bezanis, “Regional Oil and Gas Update,” OMRI Daily Digest, No. 51, Part I, 13 March 1997; “Yeltsin Signs Decree on Caspian Pipeline Consortium,” RFE/RL Newsline, Vol. 1, No. 20, Part I, 28 April 1997; “New Deal Signed on Caspian Pipeline Consortium,” RFE/RL Newsline, Vol. 1, No. 32, Part I, 16 May 1997; “Russia Closes Deal for $2 Billion Oil Pipeline,” Reuters news agency report from Moscow, 16 May 1997; “Chevron Boss Antici- pates Delays in Building Caspian Pipeline,” RFE/RL Newsline, 23 May 1997. 72. Natiq Aliyev, “Choosing the Route for ‘Early Oil,’” Azerbaijan International 3.3 (Autumn 1995), pp. 44, 53. 73. Sagheb and Javadi, “Oil: Azerbaijan’s Economic Rebirth,” p. 13; idem., “Azerbaijan’s Contract of the Century,” p. 27; Elizabeth Fuller, “Transcaucasus: Between Anarchy and Despotism,” Transition, 15 February 1995, p. 63; idem., “The ‘Near Abroad,’” p. 34; Gareth M. Winrow, “Turkey’s Role in Asian Pipeline Politics,” Jane’s Intelligence Review, 2 Feb- ruary 1997. 74. Roberts, Caspian Pipelines, pp. 36, 80. 75. Winrow, “Turkey’s Role.” 76. Roberts, Caspian Pipelines, p. 37. 77. Azad Isa-Zade, “Who Gets the Oil?,” WarReport, no. 42 (June 1996), p. 41; RusData DiaLine-BizEkon News, 17 December 1996, quoting from Segodnya, no. 234, p. 5; Itar-Tass news agency report from Baku, 3 January 1997; Win- row, “Turkey’s Role.” 78. “Russia Refused to Transport Oil from Azerbaijan through Chechnya,” Segodnya, 5 February 1997; Lowell Bezanis, “Caspian Oil Export Problems,” OMRI Daily Digest, No. 26, Part I, 6 February 1997; Liz Fuller, “Transneft Clari- fies Stance on Transporting Caspian Oil,” OMRI Daily Digest, No. 28, Part I, 10 February 1997; Pope, “Two Pipeline Projects.” 79. “Oil Export Prospects Improved,” RFE/RL Newsline, Vol. 1, No. 29, Part I, 13 May 1997; “Russia, Chechnya Sign Agreement on Oil Transit,” RFE/RL Newsline, 26 May 1997. 80. Liz Fuller, “Chechnya Demands Share of Transit Tariffs for Caspian Oil,” OMRI Daily Digest, No. 243, Part I, 18 December 1996; Igor Rotar, “The Foundation of Independence or a Menace? Chechen Oil Is Both,” Nezavisimaya Gazeta, 27 December 1996; Yuliya Kalinina, “Pipeline Smell of Chechen Peace,” Moskovskiy Komsomolets, 30 January 1997; Lowell Bezanis, “Pipeline, Caspian Update,” OMRI Daily Digest, No. 23, Part I, 3 February 1997. 81. Liz Fuller, “Novorossiisk Pipeline,” OMRI Daily Digest, No. 41, Part I, 27 February 1997; “Russia: Chechen President Asks Consortium to Sign Oil Transit Deal,” RFE/RL report from Grozny, 28 April 1997. 82. “Maskhadov Wants Another Contract on Caspian Oil Transportation,” RFE/RL Newsline, Vol. 1, No. 21, Part I, 29 April 1997. 83. Isa-Zade, “Who Gets the Oil?,” p. 41. 84. Blair, “Azerbaijan International Operating Company”; “Georgian Route for Azerbaijani Oil to Cost 315 Million Dol- lars,” Itar-Tass news agency report from Baku, 28 February 1997; Lowell Bezanis, “AIOC Funds Baku-Supsa Pipeline,” OMRI Daily Digest, No. 43, Part I, 3 March 1997. 85. Winrow, “Turkey’s Role.” 86. “The Capacity of the Georgian Pipeline Increased Up to 10 Million Tons,” Resonansi, No. 101, 16 April 1997, p. 2, and “The Georgian Pipeline Will Be Patronised by the Norwegians,” Resonansi, No. 109, 24 April 1997, p. 2, both as sum-

37 marized in Transcaucasia Media Project: Annotated Daily Headlines of the Transcaucasian Press, 16 and 24 April 1997. 87. Georgian Radio report (Tbilisi), 24 January 1997. 88. “Georgia Hosts ‘TRASECA’ Conference,” RFE/RL Newsline, Vol. 1, No. 9, Part I, 11 April 1997. 89. Reuters European Business Report, 16 December 1996; “Ukraine May Become a Bridge Connecting Armenia with the West, Says Ukrainian Ambassador in Armenia,” Armenpress news agency report from Yerevan, 22 May 1997. 90. “Ukraine, Georgia Seek to End Moscow Oil Dependence,” Reuters news agency report from Kiev, 14 February 1997. 91. Liz Fuller, “Aliev in Kyiv,” OMRI Daily Digest, No. 59, Part I, 25 March 1997. 92. “Will Interests of Christian States Collide?,” Noyan Tapan news agency report from Yerevan, 26 March 1997. 93. Ustina Markus, “Roundup of Georgian President’s Visit to Ukraine,” OMRI Daily Digest, No. 33, Part II, 17 February 1997. 94. “Azerbaijani President in Turkey,” RFE/RL Newsline, Vol. 1, No. 25, Part I, 6 May 1997. 95. Winrow, “Turkey’s Role.” 96. Roberts, Caspian Pipelines, p. 29. 97. Necdet Pamir, “Getting Azerbaijan’s Oil to the International Market: The Turkish Perspective,” Azerbaijan Internation- al 3.3 (Autumn 1995), pp. 54-55. 98. “Turkey, Azerbaijan Sign Declaration on Strategic Cooperation,” Xinhua news agency report from Ankara, 5 May 1997; “Azerbaijan Reiterates Autonomy Call,” Itar-Tass news agency report from Ankara, as posted on Asbarez-On- Line, 8 May 1997. 99. “Turkey Signs Baku-Ceyhan Pipeline Deal,” Reuters news agency report from Ankara, as posted on Asbarez-On-Line, 15 May 1997. 100. Lowell Bezanis, “Regional Oil and Gas Update,” OMRI Daily Digest, No. 51, Part I, 13 March 1997; “Trans-Caspian Pipeline in the Offing?,” RFE/RL Newsline, Vol. 1, No. 35, Part I, 21 May 1997. 101. “Azeri President Envisages New Oil Link via Georgia,” Reuters news agency report from Baku, 19 February 1997. 102. “Aliyev Offers Armenia Pipeline in Return for ‘Territories,’” Reuters news agency report from Baku, as posted on Asbarez-On-Line, 1 May 1997. 103. “Armenia Rejects Aliyev Proposal on Pipeline,” Asbarez-On-Line, 2 May 1997; “Alternative Pipeline through Armenia Is of Economic Interest, Says Armenian Foreign Ministry Spokesman,” Armenpress news agency report from Yerevan, 5 May 1997; “Armenia Doesn’t Link Karabakh Problem to Oil Pipeline Issue,” Noyan Tapan news agency report from Yerevan, 7 May 1997. 104. “Greece Supports Azeri Membership of EC,” Itar-Tass news agency report from Baku, as posted on Asbarez-On-Line, 14 April 1997. 105. Barbara J. Merguerian, “Azerbaijan/Oil Coalition Opens Campaign to Increase U.S. Presence in the Caucasus,” Azg/Mirror-Spectator On Line, 19 February 1997. 106. “Caspian Oil Pipeline Expansion Studied,” United Press International (UPI) news agency report from London, 21 February 1997. 107. Winrow, “Turkey’s Role”; Robert Lyle, “Caucasus: Loan to Boost Oil Pipeline Options,” RFE/RL report from Washing- ton, 7 April 1997; Transcaucasus: A Chronology (e-mail edition), Vol. VI, No. 5 (May 1997). 108. Hasan Guliev, “Oil in Troubled Waters,” WarReport, no. 50 (April 1997), p. 18. 109. Laurie Lande, “Caspian Sea’s Murky Legal Status Curbs Oil, Gas Development,” Dow Jones news item from New York, 30 May 1997. 110. “The Combustible Caspian,” The Economist, 11 January 1997, p. 27. 111. Lowell Bezanis, “Turkmenistan and Azerbaijan Tangle over Oil Field,” OMRI Daily Digest, No. 19, Part I, 28 January 1997; idem., “Pipeline, Caspian Update,” OMRI Daily Digest, No. 23, Part I, 3 February 1997; “Turkmenistan’s Caspi- an Policy Unchanged,” RFE/RL Newsline, Vol. 1, No. 42, Part I, 30 May 1997. 112. “Row over Caspian Energy a Nightmare for Oil Majors,” Reuters news agency report from Almaty, 30 January 1997. 113. Zokhra Meredova, “Azerbaijan: Turkmenistan’s Claims on Oil Fields Rejected,” RFE/RL report from Prague, 28 Janu- ary 1997; Interfax news agency reports, 26 and 29 January 1997.

38 114. Lowell Bezanis, “Turkmen President in Almaty,” OMRI Daily Digest, No. 42, Part I, 28 February 1997. 115. Zaur Kadymbekov, “Dividing the Caspian Sea,” Pravda-5, No. 5, 1997; Lowell Bezanis, “Caspian Update,” OMRI Daily Digest, No. 32, Part I, 14 February 1997. 116. Azerbaijan International 3.3 (Autumn 1995), p. 50; Natiq Aliyev, “From SOCAR’s Perspective,” Azerbaijan Interna- tional 3.4 (Winter 1995), p. 26; “Caspian International Petroleum Company Formed for Exploration, Development of Karabakh Prospect,” Azerbaijan International 4.3 (Autumn 1996), posted on-line at http://www.azer.com/43- .folder/43.caspian.html; James Tilley, “CIPCO: Developing the Karabakh Prospect,” Azerbaijan International 4.4 (Win- ter 1996), posted on-line at http://www.azer.com/44.folder/44.socar.cipco.html. 117. United States Department of Energy, Energy Information Administration, “Azerbaijan,” May 1996, http://www.eia.doe.gov/emeu/cabs/azerbjan.html; “Elf Aquitaine Signs Production Sharing Contract for Shah Deniz Per- mit in Azerbaijan,” press release, Paris-Baku, 4 June 1996; “Shah Deniz Signed: Third Major Contract in Caspian,” Azerbaijan International 4.3 (Autumn 1996), posted on-line at http://www.azer.com/43.folder/43.shah.html. 118. Interfax news agency report, 14 December 1996; “Caspian Oil Deal Ratified,” Reuters news agency report from Baku, as posted on Asbarez-On-Line, 26 February 1997; “Fourth Oil Consortium Signed: Dan Ulduzu and Ashrafi Prospects,” Azerbaijan International 4.4 (Winter 1996), posted on-line at http://www.azer.com/44.folder/44.socar.oilconsortium.html. 119. Lowell Bezanis, “Oil Deal Signed During Aliev’s Visit to France,” OMRI Daily Digest, No. 9, Part I, 14 January 1997; Transcaucasus: A Chronology (e-mail edition), Vol. VI, No. 2 (February 1997); “Iran Obtains 10% Share in Azerbai- jan’s Fifth Oil Consortium,” RFE/RL Newsline, Vol. 1, No. 41, Part I, 29 May 1997. 120. “Exxon/Socar Sign Memorandum of Understanding,” 6 June 1996, on-line posting at http://www.twoten.press.net:80/stories/96/06/06/headlines/ENERGY-Exxon-Socar.html; “Exxon, Azeris May Sign New Caspian Oil Deal in 1997,” Reuters news agency report from Baku, 14 February 1997. 121. “Azeri, Japanese Firms in Caspian Exploration Deal,” Reuters news agency report from Baku, 15 March 1997. 122. Aliyev, “From SOCAR’s Perspective,” p. 26. 123. Noyan Tapan news agency report, 15 January 1997. 124. Azerbaijan International 2.1 (June 1993), p. 7. 125. “U.S.-Azerbaijan Chamber of Commerce Targets Section 907 for Defeat: Day-Long Conference Marked by Repeated Attacks on ‘Armenian Lobby,’” Armenian National Committee of America Press Release, Washington, DC, 20 February 1997. 126. Robert Lyle, “Russia/Azerbaijan: Caspian Sea May Be The Next Great Oilfield,” RFE/RL report from Washington, 19 February 1997; “Armenia Painted as ‘Aggressor’ at Azerbaijan Investment Symposium,” Armenian Assembly of Ameri- ca Press Release, Washington, DC, 24 February 1997. Another former U.S. Secretary of Defense who has recently also publicly criticized the Clinton administration’s policy of providing Armenia with “more aid from the United States per capita than any nation but Israel” and the Congress for making “it illegal to give direct American assis- tance to Azerbaijan” is Caspar Weinberger. He has written that “the Clinton Administration needs to encourage clos- er relations with Azerbaijan and persuade Congress to change its priorities on aid” for, he suggests, America’s long- term security interests are at stake; see Caspar W. Weinberger and Peter Schweizer, “Russia’s Oil Grab,” The New York Times, 9 May 1997. For similar suggestions see S. Frederick Starr, “Power Failure: American Policy in the Caspi- an,” The National Interest, No. 47 (Spring 1997), pp. 20-31; Trudy Rubin, “Russia Fuels War in Caucasus to Keep Oil Out of Western Hands,” The Philadelphia Inquirer, 2 May 1997. 127. “Ilham Aliyev, SOCAR VP, Foreign Economic Relations: Interviewed by Betty Blair,” Azerbaijan International 4.4 (Win- ter 1996), posted on-line at http://www.azer.com/44.folder/44.socar.html. 128. “Russian Oil Company to Boost Cooperation with Azerbaijan,” RFE/RL Newsline, Vol. 1, No. 30, Part I, 14 May 1997. 129. “Yerevan Denies Allegations on Illegal Supply of Russian Arms to Armenia,” Noyan Tapan news agency report from Yerevan, 15 February 1997; “Duma Leaders Demand Explanation on Possible Information Leak,” Noyan Tapan news agency report from Yerevan, as posted on Asbarez-On-Line, 4 April 1997. 130. “Duma orders investigation into arms supplies to Armenia,” BBC Summary of World Broadcasts, quoting Interfax news agency (Moscow), 16 and 19 February 1997; “Interrogation of High Military Officials in Russian Prosecutor’s Office: The Case of Weaponry Supply to Armenia Being Investigated,” Asbarez-On-Line, 18 April 1997. 131. “Yeltsin Not Involved in ‘Yerevangate,’” RFE/RL Newsline, Vol. 1, No. 10, Part I, 14 April 1997. 132. “Rokhlin Cancels Visit to Yerevan,” Asbarez-On-Line, 26 February 1997.

39 133. “Russian Duma Changes the Attitude to Stationing Military Bases in Armenia?,” Respublika Armenia, 28 January 1997. 134. Bernard Lewis, “The West and the Middle East,” Foreign Affairs, Vol. 76, No. 1 (January/February 1997), p. 119. 135. Goltz, “Oil and Civil Society,” p. 41. 136. For details of such recent cases, see Xinhua news agency report from Moscow, 24 January 1997; Lowell Bezanis, “Offi- cials Say Coup Attempt in Azerbaijan Thwarted,” OMRI Daily Digest, No. 18, Part I, 27 January 1997; “Azerbaijani Gov- ernment Holds Repressions Against Opposition Parties,” Snark news agency report, 27 January 1997; Asbarez-On-Line, 29 January 1997; Lowell Bezanis, “Generals Sentenced in Azerbaijan,” OMRI Daily Digest, No. 21, Part I, 30 January 1997; idem., “Trials Update in Azerbaijan,” OMRI Daily Digest, No. 22, Part I, 31 January 1997. 137. Reuters news agency report, as posted on Asbarez-On-Line, 28 January 1997; Liz Fuller, “Another Coup Thwarted in Azer- baijan?,” OMRI Daily Digest, No. 28, Part I, 10 February 1997. 138. “Top Guns Try to Polish Azerbaijan Policy,” United Press International (UPI) news agency report from Washing- ton, 6 July 1997; Laurie Lande, “U.S. Should Help Central Asian Nations Be Independent,” The Wall Street Journal, 21 July 1997. 139. Laurie Lande, “Azerbaijan Sign Pact, Aim For Peace In Nagorno-Karabakh,” The Wall Street Journal, 4 August 1997. 140. “Azeris to Sign Three New Oil Deals with U.S. Firms,” Reuters news agency report from Baku, 23 June 1997; “Azerbai- jan Reaches Oil Deal With US,” Associated Press (AP) news agency report from Baku, posted on Asbarez-On-Line, 25 July 1997; “Azerbaijan President Has Plans to Sign Oil Contracts,” The Wall Street Journal, 30 July 1997. 141. Marsha Burton, “Azerbaijan President Seeks To Repeal Ban On Aid To Country,” The Wall Street Journal, 4 August 1997. 142. “President Clinton Signs Bilateral Treaty with Azerbaijan,” Armenian Assembly of America Press Release, 6 August 1997. 143. Marsha Burton, “Azerbaijan President Seeks To Repeal Ban On Aid To Country,” The Wall Street Journal, 4 August 1997. 144. “Russia, Chechnya Agree on Transit of Azerbaijani Oil,” RFE/RL Newsline, Vol. 1, No. 52, Part I, 13 June 1997; “Update on Russian-Chechen Agreements,” RFE/RL Newsline, Vol. 1, No. 53, Part I, 16 June 1997; “Chechen President in Baku,” RFE/RL Newsline, Vol. 1, No. 65, Part I, 2 July 1997. 145. “Caspian Oil Transit Deal Seen as Only a First Step,” Reuters news agency report from Moscow, 14 July 1997; “Russ- ian-Chechen-Azerbaijani Oil Agreement Signed,” RFE/RL Newsline, Vol. 1, No. 72, Part I, 14 July 1997. 146. “Chechnya Accuses Russia of Sabotaging Oil Transit Agreement,” RFE/RL Newsline, 30 July 1997; “Russia Considering New Oil Pipeline to Bypass Chechnya,” RFE/RL Newsline, Vol. 1, No. 90, Part I, 7 August 1997. 147. “TRACECA: A Guarantor of Georgia’s Economic and Political Stability,” Kavkasioni, No. 132, 1 August 1997, pp. 1, 2, as summarized in Annotated Daily Headlines of the Georgian Press compiled by the Caucasian Institute for Peace, Democ- racy and Development (CIPDD), 1 August 1997. 148. “TRACECA Endangered,” Resonansi, No. 187, 11 July 1997, p. 2, as summarized in Annotated Daily Headlines of the Georgian Press compiled by the Caucasian Institute for Peace, Democracy and Development (CIPDD), 11 July 1997. 149. “AIOC Says Politics May Decide Azeri Oil Line Route,” Reuters news agency report from Baku, 13 June 1997; “Wash- ington Wants More than One Caspian Pipeline,” Reuters news agency report from Baku, posted on Asbarez-On-Line, 23 July 1997; “Azerbaijani President Upbeat Over Baku-Ceyhan Pipeline,” RFE/RL Newsline, 31 July 1997. 150. “Kazakstan, Azerbaijan To Build Trans-Caspian Oil Pipeline,” The Wall Street Journal, 10 June 1997; “Azeris, Kazakhs Agree to Caspian Pipeline Deal,” Reuters news agency report from Almaty, quoted in Asbarez-On-Line, 10 June 1997. 151. “Georgia, Turkey Pledge to Support Oil Pipeline,” Reuters news agency report from Tbilisi, posted on Asbarez-On- Line, 15 July 1997. 152. “Georgian President in U.S.,” RFE/RL Newsline, Vol. 1, No. 77, Part I, 21 July 1997. 153. “Consortium Assesses Export Pipelines,” RFE/RL Newsline, Vol. 1, No. 54, Part I, 17 June 1997. 154. “Greece to Cooperate with Kazakh Oil, Gas Industry,” Reuters news agency report from Almaty, 3 July 1997. 155. “Pakistani Foreign Minister in Azerbaijan,” RFE/RL Newsline, Vol. 1, No. 75, Part I, 17 July 1997. 156. “Turkmenistan Protests Creation of New Caspian Consortium,” RFE/RL Newsline, Vol. 1, No. 67, Part I, 7 July 1997; “Russian, Turkmen Presidents Discuss Oil,” RFE/RL Newsline, Vol. 1, No. 91, Part I, 8 August 1997.

40 157. “Caspian Oil Explorers Play Down Turkmen Tantrums,” Reuters news agency report from Moscow, 7 July 1997; “Turkmenistan Warns Azerbaijan It May Make Oilfields Appeal,” The Wall Street Journal, 7 July 1997; “Azerbaijani- Turkmen Oil Row Continues,” RFE/RL Newsline, Vol. 1, No. 68, Part I, 8 July 1997. 158. “Caspian Oil Transit Deal Seen as Only a First Step,” Reuters news agency report from Moscow, 14 July 1997. 159. “Turkmens Say No Retreat On Caspian Oil Field Row,” Reuters news agency report from Almaty, posted on Asbarez- On-Line, 28 July 1997. 160. “Shell Oil Shows Interest in Turkmen Hydrocarbons,” RFE/RL Newsline, 30 July 1997. 161. “Turkmen President Says No Compromise on Caspian Oil Field,” RFE/RL Newsline, 29 July 1997. 162. “Russia Pulls Out of Billion Dollar Oil Deal,” AP news agency report from Moscow, posted on Asbarez-On-Line, 31 July 1997; “Russia Annuls Kyapaz Contract,” RFE/RL Newsline, 1 August 1997. 163. “Confusion over LUKoil’s Participation in Kyapaz/Serdar,” RFE/RL Newsline, Vol. 1, No. 89, Part I, 6 August 1997. 164. Natalia Salnikova, “Boris Yeltsin Called the Agreement on the Development of the Kyapaz Deposit ‘a Mistake’ and Announced Its Cancellation,” RIA/Novosti news agency report from Moscow, 7 August 1997; “Russian, Turkmen Presidents Discuss Oil,” RFE/RL Newsline, Vol. 1, No. 91, Part I, 8 August 1997. 165. Hasan Javadi, Background Report on the Turkmenistan/Azerbaijan Oil Dispute, The Voice of America, 30 July 1997; “New Caspian Oil Agreements Signed,” RFE/RL Newsline, Vol. 1, No. 87, Part I, 4 August 1997; “Dispute Over Kyapaz Oil Field Continues,” RFE/RL Newsline, Vol. 1, No. 92, Part I, 11 August 1997.

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