Amid Risk, Baku-Ceyhan Pipeline Edges Forward

On December 1, an association of environmentalist groups stepped up its campaign against the Baku-Tbilisi-Ceyhan oil pipeline, a 1,760-kilometer project designed to carry oil from the Caspian Sea through Georgia to a Turkish port on the Mediterranean. The group announced that Barclays Bank had declined to make a loan to the project. This news potentially places additional pressure on host governments to manage the pace and cost of pipeline construction.

When Barclays Bank declined on December 1, according to the Baku-Ceyhan Campaign, it cited its commitment to social principles - a possible reference to criticism from human-rights groups regarding the project's effect on the region's environment.

Political questions are also clouding pipeline construction. Georgia is now striving to assemble a stable new government following political upheaval sparked by a rigged parliamentary election November 2. [For background see the Eurasia Insight archive]. Meanwhile, questions surround Azerbaijan's ability to keep the pipeline project on track following the retirement of former president Heidar Aliyev, who was replaced by his son, Ilham, in an October election tainted by charges of widespread fraud. [For background see the Eurasia Insight archive].

Georgia plans to hold presidential elections January 4, following former president Eduard Shevardnadze's resignation. [For background, see EurasiaNet's "Choice 2003" package]. Whether Barclays was acting out of principle or seeking to avoid messy proceedings, the fragility of government institutions could slow critical phases of pipeline development.

"I think that the new presidential and parliamentary elections to be held in connection with [Shevardnadze's resignation] might influence or delay our organizational activities," State Oil Company of Azerbaijan Natiq Aliyev told Baku's ANS television the day after Shevardnadze quit. "We are concerned about this." [For background on the state oil company, see the Eurasia Insight archive].

The pipeline consortium's largest shareholder, Anglo-American energy giant BP, has publicly reiterated its commitment to Georgia and the project. David Woodward, BP's top employee in Azerbaijan, held talks with Georgia's interim government on November 28. After meeting with acting president Nino Burjanadze, he said: "We are pleased to hear the president saying that she and the government fully support this project."

Woodward added: "Activities have not been affected at all by the events of the last two weeks. The pipeline is well under construction. In Georgia, we have built over 35 percent of the pipe." Mikhail Saakashvili, the opposition's leader and presidential candidate, has fervently embraced the project. "All strategic contracts in Georgia, especially the contract for the Caspian pipeline, are a matter of survival for the Georgian state," he told reporters on November 26.

BTC is scheduled for completion in 2005 and a similar, BP-led project to deliver natural gas from Azerbaijan to Turkey, is slated to finish in 2006. However, both have been hampered by logistical complications. The BTC consortium had predicted that 40 percent of the route would be in place by January 1. But the Georgian section has faced some delays and is lagging behind the schedule due to operational problems, including environmental and legal issues. The onset of winter will stall work in many sections. The consortium announced in a November 27 bulletin that "by the end of 2003, a quarter of the physical work needed to build the pipeline will be completed." This is a downward revision from earlier estimates.

All three host countries – Azerbaijan, Georgia and Turkey – are eager to meet construction deadlines. Turkey and Georgia owe substantial amounts to international lenders, which pipeline transit revenue could help defray. Azerbaijan has set up a state Oil Fund www.oilfund.az- expressly mandated with using natural-resource revenue to benefit future generations- to win support from key international lenders. Delays could make these obligations more costly.

The political damage that could spin out from such delays may preoccupy international lenders. Two major institutions, the World Bank's International Finance Corporation and the European Bank for Reconstruction and Development, committed financing for the project in early November. [For background, see the Eurasia Insight archive]. According to Natiq Aliyev, the lenders and the consortium are expected to sign a credit agreement worth more than $500 million in London on December 15.

Like the governments involved, lenders may consider it essential to convey an image of steadiness to potential investors. Amid such reassurances, though, all participants are likely to keep a wary eye on the developments of the next few months. "The break in stability can affect the realization of big projects," Natiq Aliyev reportedly warned. With no shortage of potential sources of instability, pipeline investors will watch the political turns of the next several weeks with unprecedented caution.