A Georgian-Russian Pipeline: For Peace or Profit?
During his recent visit to Moscow, Georgian President Mikheil Saakashvili made what seemed to be an unusual offer. If Russia wished to construct an oil pipeline through Georgia, he said, Tbilisi would be ready to assist.
What explains such a proposal, given the mutual suspicion that has marked relations between Moscow and Tbilisi in recent years? [For additional information see the Eurasia Insight archive]. Georgia is already a participant in the Baku-Tbilisi-Ceyhan (BTC) pipeline, a US-backed, $3.6 billion project that aims to divert oil, and, in the future, gas around Russia. Indeed, the BTC pipeline is widely seen as a tool to diminish Russian influence in the energy-rich Caspian Basin, a region whose proven oil reserves equal 3 percent of the world's total, according to the US Energy Information Administration.
For Saakashvili's administration, the Georgian-Russian pipeline would be viewed in large measure as a conflict-resolution instrument. The proposed pipeline would pass from the Russian port of Novorossiisk, along the Black Sea Coast to Georgia via Abkhazia, the breakaway Georgian region that has become a de facto Russian protectorate. Several thousand Russian troops have been stationed in Abkhazia as part of a CIS peacekeeping force since the end of Abkhazia's hostilities with Georgia in 1993. [For additional information see the Eurasia Insight archive]. Abkhaz residents can opt for Russian citizenship, and face no immigration formalities when crossing the border into Russia.
Since his election as president in January, Saakashvili has made restoring Georgian sovereignty over Abkhazia a top priority. Economic incentives could sweeten the potential Russian pipeline deal, the president has told supporters. Aside from a few thousand jobs, the BTC pipeline is expected to bring Georgia some $60 million annually in transit fees. If Abkhazia received a share of the profits from a similar pipeline passing through its territory en route to linking up to the BTC pipeline, policy-makers in Tbilisi believe Sukhumi might prove more amenable to reintegration with Georgia.
The proposal, however, contains one obvious obstacle: securing a pact that determines Abkhazia's political status. [For background see the Eurasia Insight archive]. Talks are currently at an impasse. Despite the public expressions of good will that surrounded Saakashvili's February 10-12 visit to Moscow, Russia and Georgia have been unable for more than a decade to find consensus on the Abkhazia question. [For background see the Eurasia Insight archive]. In addition, Abkhaz leaders have shown no willingness to accept Georgia's current offer of broad autonomy within the Georgian state. In UN-hosted talks with Georgian representatives last month -- the first in three years -- Abkhazia maintained its demands for full independence. Abkhazia also refused to take part with Georgia in peace talks sponsored by Britain, Germany, Russia and the United States last month in Geneva.
For Moscow, the timing may be right for both Abkhaz peace and a pipeline. Russia has taken a dim view of growing US influence in Georgia. The BTC pipeline, a project that would effectively end Russia's monopoly on energy transport systems in the Caspian Basin, is a constant reminder of the spreading US presence. Piggybacking its own oil feeds onto BTC -- either directly, or on a parallel track -- could help Russia re-emphasize its own status as a major player in the region.
At the same time, latching onto a pipeline with Georgia is also a matter of protecting Russia's big-dollar energy trade. The Russian Black Sea port at Novorossiisk is a point of departure for oil of Russian origin, as well as for Kazakhstani oil. But with restrictions now placed on oil tankers traveling through Turkey's Bosporus Straits, Russia is feeling a need to find additional transit routes, given anticipated increases in volume from Russian and Kazakhstani fields in coming years. Consequently, Turkey's Mediterranean outlet of Ceyhan beckons.
Russia is additionally keen to increase oil exports to expanding South Asian markets. In the past, Russian companies have even shipped oil to Asia via the Gulf of Finland -- a treacherous route for decrepit tankers. Oil traffic in the Gulf of Finland is expected to triple within the next 15 years, the Finnish daily Helsingin Sanomat reported in 2003. Even as Russia expands its massive Primorsk oil terminal north of St. Petersburg, congested waterways mean additional outlets are badly needed. Ceyhan provides a more direct, secure route to South Asia than either this route or the Bosporus; providing a convenient outlet for shipment through the Suez Canal, or an Israeli pipeline reversed to convey Russian oil to Asian markets.
Energy markets within the Caucasus and Turkey are also part of Moscow's decision-making calculus regarding Abkhazia. Anatoly Chubais, chairman of United Energy Systems, the Russian monopoly that controls Georgia's main power company, would like to use Georgia as a hub to export electricity throughout the region. However, without the input of the Inguri hydroelectric power station, located on the Abkhaz-Georgian border, this task could prove prohibitively difficult.
Even if Moscow believes it can gain from a Russian-Georgian pipeline, and is prepared to promote a political settlement in Abkhazia to do so, foreign investors will need to find the project attractive. Several potential obstacles could block the deal.
First, if Kazakhstani oil flows through the Georgian-Russian pipeline, the project would appear to undermine BTC's geopolitical rationale of circumventing Russia. It is important to consider, however, that sending Kazakhstani oil to Ceyhan via the Caspian Pipeline Consortium (CPC) pipeline would not diminish the direct oil flow from Azerbaijan's Caspian fields. It would also guarantee that the BTC pipeline is utilized at near capacity -- something that is not guaranteed if Kazakhstani oil is shipped by tanker across the Caspian. At present, the tanker option is the most realistic alternative for getting Kazakhstani oil to reach the BTC pipeline without passing through Russian territory.
Another concern stems from the assumption that more oil will eventually flow from Kazakhstani fields than BTC can accommodate. Kazakhstan's Ministry of Energy and Mineral Resources has estimated the country's output at 1.2 million barrels per day by 2005 and 3.5 million by 2015. Upon its completion in April 2005, the BTC pipeline should accommodate 1 million barrels per day. For it to handle greater amounts of oil from Kazakhstan, the pipeline's capacity could be expanded.
An alternative exists -- construction of a southern export pipeline through Iran. Long promoted by Tehran, such a pipeline could also provide the additional needed capacity. But, so far, the threat of US trade sanctions against countries that support such an export option has succeeded in discouraging potential investors in the Iranian route. Even if Washington were to change its position, the cost of such a project would have to be compared to the cost of building a shorter Russian-Georgian spur, in addition to the expansion of BTC.
The quality of Russian oil, with its lower grade, presents a third possible obstacle to a Georgian-Russian route. The blending of Russian oil with higher quality Caspian oil could diminish the value of the crude that emerges at Ceyhan. BTC already confronts a similar problem if it plans to accommodate higher-grade Azerbaijani oil with Kazakhstani oil. Whether this can be sufficiently mitigated by "batching" different oil flows through the pipeline could help determine the fate of the project.
Saakashvili's proposal to build a second pipeline parallel to the BTC line is an alternative to batching, a technique that involves moving different flows of oil through one pipeline. An analysis of the costs and benefits involved in sending different combinations of oil through BTC, or in building an adjacent pipeline, would be required.
Finally, the potential capacity of the port at Ceyhan needs to be considered. If a Russian-Georgian pipeline were built, Ceyhan would find itself handling not only Caspian and Russian oil, but, also, increasing oil flows from Iraq. Exports of roughly 300,000 barrels per day from Iraq's northern Kirkuk oil fields are expected to start flowing to Ceyhan by mid-March. The Turkish port has a storage capacity of 9 million barrels. To accommodate all of these feeds, Ceyhan's capacity may need to be increased or nearby ports developed.
Despite Moscow's initial outspoken opposition to BTC, the pipeline now promises to bring Russia substantial benefits. If potential investors agree, a solution to the Abkhaz conflict could come sooner than expected.
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