Business & Economics:
ISTANBUL CONFERENCE: QUIET CONCERN OVER BAKU-TBILISI-CEYHAN PIPELINE'S FATE
Ariel Cohen: 6/02/03

Corporate executives and energy experts are quietly concerned about the future of the Baku-Tbilisi-Ceyhan pipeline, which is viewed as the engine for the Caspian Basin’s economic development. Many participants at a recent energy conference in Istanbul raised the possibility that a significant rise in Baghdad’s oil and gas exports would change the investment climate and the geopolitical reality for the Baku-Tbilisi-Ceyhan route.

Official presentations at the May 27-28 Caspian Oil and Gas Conference generally painted an upbeat picture concerning the Baku-Tbilisi-Ceyhan (BTC) project. [For additional information see the Eurasia Insight archive]. However, the mood on BTC during private discussions among experts and executives was significantly more restrained. The ouster of Iraqi dictator Saddam Hussein has altered the regional energy outlook. Many believe the prospect of expanded access to Iraqi energy reserves could cause investors to reconsider relatively expensive Caspian off-shore projects and the construction of the lengthy BTC route.

Work on BTC is ongoing. On May 23, Georgia’s president, Eduard Shevardnadze, attended a ribbon-cutting ceremony, formally launching BTC construction work on Georgian territory. Overall, BTC work is expected to generate thousands of well-paying jobs in Azerbaijan, Georgia and Turkey. Over the longer term, Azerbaijan is counting on the pipeline to serve as the main export conduit for the country’s abundant energy reserves. At the same time, Georgian officials hope their country’s transit role will enable Tbilisi to reduce its energy dependence on Russia.

Even though it is already under construction, several recent developments have increased speculation on whether BTC will be able to stick to its existing timetable, under which the pipeline should be operational in 2005. Among the two most significant developments are; growing concern over Azerbaijan’s BTC financing; and the state of Azerbaijani President Heidar Aliyev’s health. [For background see the Eurasia Insight archive]. In addition, there are unresolved issues – including the stalemated Nagorno-Karabakh peace process and the deadlocked Caspian Sea territorial talks [For background see the Eurasia Insight archive] – that could hamper BTC’s ability to realize its full potential.

Thus far, Azerbaijan has served as the chief catalyst for BTC, a fact that isn’t so surprising since Baku stands to benefit from the pipeline more than any other Caspian Basin state. Of late, however, BTC construction in Azerbaijan has been clouded by financing uncertainty. The International Finance Corp. is withholding a $150 million loan until Baku addresses ecological concerns connected with BTC construction in and around the Borjomi Gorge. [For background see the Eurasia Insight archive]. The IFC is expected to make a final decision on the loan in October or November. In the meantime, some experts are wondering whether Aliyev’s recent health woes will force him from the political stage. If Aliyev’s forceful leadership is lacking, Azerbaijani officials may be hard-pressed to keep the BTC project on schedule.

A serious construction delay or other problem could endanger BTC altogether, given that the project is facing growing competition from other existing and potential energy export routes. For example, Kazakhstani representative Uzakbai Karabalin, president of the government-owned KazMunaiGaz, said that Kazakhstan wants to work with several oil conglomerates, including TotalFinaElf, Phillips and ENI – to develop a pipeline that will allow Astana to export oil from the giant Kashagan field via the Caspian Pipeline Consortium (CPC). [For additional information see the Eurasia Insight archives].

Karabalin added that connecting Kazakhstan to BTC is also under consideration, but stressed that if Western investment declined, Kazakhstan would "turn to the East," and explore the feasibility of building a pipeline that could supply China’s burgeoning and lucrative market. Kazakhstani participants also indicated that Astana may increase oil swaps with Iran. These swaps already have risen from 50,000 tons a month in 2002 to 180,000 tons in January 2003. At present, Iran is undertaking the expansion of its Caspian port of Neka. Iran is also interested in building a refinery along the Caspian coast.

Iranian representatives at the Istanbul conference aggressively promoted Iran as a transit country for Kazakhstani oil via a proposed North-South oil pipeline – a suggestion supported by a number of participants, including those from the French TotalFinaElf and a small Georgian company that currently specializes in rail transport of Kazakh oil to Iran. [For additional information see the Eurasia Insight archive].

Iran’s claim of a 20 percent share of the Caspian is widely viewed as the most significant obstacle to a five-nation accord governing the sea’s territorial status. At the Istanbul conference, Tehran’s special envoy on Caspian Sea affairs, Mehdi Safari, struck a relatively moderate public stance on the Caspian territorial division question. However, in private, Iranian officials engaged in obstreperous rhetoric. One Energy Ministry official castigated the United States as being "ruled by a 2-percent minority of the population," adding that the Bush administration "went to war in Iraq for oil." The British-educated official identified himself as a "reformer" and a supporter of President Mohammed Khatami. He claimed that the US policy "undermines the reformers like himself."

Also at the conference, participants reacted with interest to two pipeline proposals that are designed to relieve congestion in the Bosphorous straits. One presentation concerned the proposed Burgas-Vlore (Albania) pipeline by the Albanian-Macedonian-Bulgarian (AMBO) corporation. Project proponents claimed Burgas-Vlore could offer cheap transit fees due to the ability of the deep water port in Vlore to accommodate large tankers. The other presentation, a Romanian-sponsored scheme called Constanta-Pancevo-Omisalj-Trieste, would feature a pipeline linking Romania, Yugoslavia and Croatia.

Meanwhile, Azerbaijani Energy Minister, Mejid Kerimov, in his concluding remarks, called for the expansion natural gas exports to already gas-inundated Turkey, which currently receives gas from Russia and Iran. Azerbaijan’s Shah Deniz field, one of the largest in Eurasia, is planned to supply 6.6 billion cubic meters of natural gas. Construction on the planned Shah Deniz-Erzurum pipeline will cost an estimated $3.2 billion, good part of it coming from the European Bank for Reconstruction and Development.

Editor’s Note: Ariel Cohen, Ph.D., is Research Fellow in Russian and Eurasian Studies at The Heritage Foundation. His expertise includes international energy security.