Oil Executive Explores Baku-Ceyhan Pipeline Prospects, As Caspian States Wrestle Over Export Routes
Q&A with Howard Chase of BP Amoco: 3/15/01

The full potential of Caspian Basin energy resources remains untapped, as the five Caspian Basin states – Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan – continue to wrestle over key issues related to oil and gas exports. [For background see the Eurasia Insight archives]. Despite repeated delays, preliminary work is proceeding on the main Western-backed export route, the Baku-Ceyhan pipeline. The multi-billion-dollar pipeline project, which is tentatively scheduled for completion in 2004, received a boost March 2, when Kazakhstani President Nursultan Nazarbaev pledged that oil from the East Kashagan field, expected to start pumping in 2005, would be exported via Baku-Ceyhan. Further enhancing Baku-Ceyhan’s prospects is the March 12 deal under which Turkey agreed to import gas from Azerbaijan’s Shahk-Deniz field. Nevertheless, it remains unclear if the Baku-Ceyhan pipeline will ultimately be built. For an international perspective on pipeline prospects, EurasiaNet spoke recently to Howard Chase, Director of International Affairs for BP Amoco, based in Washington, D.C. The text of the conversation follows.

EurasiaNet: Perhaps the best place to start is to review the status of the initial six months of engineering work currently under way for the Baku-Tbilisi-Ceyhan (BTC) pipeline.

Chase: I appreciate your interest. Your question refers to the $25 million basic engineering phase that started in December. It is going very well; it is at the halfway point now and should be completed on schedule in May.

EurasiaNet: Do you anticipate that the twelve-month follow-on phase will indeed be conducted?

Chase: We are confident that the initial six-month study phase will provide the information necessary for BP’s partners in the pipeline to take the decision to go to the next stage, that is, to conduct the subsequent twelve-month detailed engineering phase.

EurasiaNet: Would the decision to conduct the detailed twelve-month engineering phase be equivalent to a decision to build the pipeline?

Chase: Let me offer an analogy. It is rather like the three stages of building a house. In the first stage, where we are now in the six-month study, you look around the land, draw the sketches and work out the approximate cost of what you might like to build. In the second part of the work, which would be the detailed engineering phase, you bring in the architects, decide where the drains and power lines go, do the detailed engineering plans and costings and so on. But generally you only get to that stage if you feel that you really want to build the house. So a decision to move to the detailed engineering implies a great deal of confidence in the project. The third stage is, of course, the actual construction.

EurasiaNet: How do you account, then, for the widespread media and academic skepticism concerning the prospects for the pipeline?

Chase: The region is geopolitically very interesting, and there can be many opinions about it from that standpoint. But on technical questions, for example about how or where to drill subsea wells, there tend to be fewer voices and greater consensus. The real indicator of whether the pipeline will be built is whether investors put their resources into it, because without investors there will be no pipeline. I might add that some observers seem unclear about the distinction between the costs of the pipeline and its economics. The most economic solution to a problem is not necessarily the least expensive.

EurasiaNet: That is not widely understood. Would you explain the difference between pipeline economics and pipeline cost?

Chase: The economics of the pipeline involve such considerations as the timing, volumes and value of the oil at the delivery point, that is, at the other end of the pipeline. BTC delivers oil in large quantities on a predictable basis to a top-class deep-water port with open access to world markets. This greatly enhances the value side of the equation. Also, do not forget that we will spend four dollars offshore in the Caspian for every dollar we spend on the pipeline. Pipeline construction is not even the lion’s share of the total investment; in fact, it almost never is. The basic question is not about investment in the pipeline, but rather about identifying the most timely and secure route for getting the oil to market. An exclusive focus on the cost of the pipeline itself ignores these other economic aspects of the overall investment project of which the pipeline is only a part.

EurasiaNet: Is there any relation between the BTC oil pipeline and the development of the Shakh-Deniz gas-and-condensate field? Some observers think that the condensate will go into the BTC pipeline, and is in fact required to make the pipeline commercial.

Chase: All I can say is that this logic is not the way we look at it from within BP. Shakh-Deniz is a major gas discovery irrespective of the condensate content. It can go ahead only with a serious long-term gas sales agreement into Turkey. That is currently under negotiation and is an important piece of business in its own right. We are proceeding with the offshore Azeri-Chirag-Guneshli (ACG) oilfield on the basis of what we know about ACG. [The ACG field is the "Contract of the Century" being developed by the Azerbaijan International Operating Company (AIOC), of which BP is the operator and largest share-holder. ACG oil is expected to go into the BTC pipeline.] If we can bring additional volumes to the BTC pipeline from elsewhere than ACG, then they will be very welcome; but they are not necessary to make the basic economics of the pipeline work.

EurasiaNet: So you are not relying on East Kashagan oil from Kazakhstan to make BTC economical either?

Chase: No, that is simply not the case. Tengiz oil will already very soon begin going through the pipeline of the Caspian Pipeline Consortium (CPC) across southern Russia to Novorossiisk. The availability of a South Caspian route would present an element of competition to the CPC pipeline. Kazakhstan might well appreciate that. But if you put yourself in an investor’s position, you would see that the decision on BTC can be made only on the basis of known resources in the Azerbaijan area. Clearly, if the pipeline can be built on that basis, then it would present a very good and economically attractive route for other oil as well, such as from Kazakhstan.

EurasiaNet: Some observers speculate that BP has to say that BTC will be built in order to get Turkey to take Shakh-Deniz gas.

Chase: From where I sit, the realities are really much simpler. ACG is a world-class oilfield. We wish to carry on developing it and get the oil to market. Our priority is to progress with the development of the ACG field, coupled with the BTC pipeline. However, we also believe that the Shakh-Deniz gas will sell very successfully into the Turkish market.

EurasiaNet: Does the recent upheaval in the Turkish political and financial system affect your business environment?

Chase: We are content to take a long-term view. Our understanding is that there is a very wide range of consensus within Turkey, that the successful construction and commercial operation of BTC is very much in the national interest.

EurasiaNet: What about the situation in Georgia, which some observers view as unstable?

Chase: Both Georgia and Azerbaijan, as sovereign states, likewise have a rightful interest in the long-term success of this project. We understand that in both these countries, as in Turkey, there is a wide consensus that the BTC project is in the national interest. Indeed, there is a solid framework of multilateral intergovernmental agreements [signed in Istanbul in November 1999] that the three national parliaments have ratified, and which bind these states contractually much like international treaties would.

EurasiaNet: Do you have a view concerning the reported statement by Russia’s deputy foreign minister Viktor Kaluzhnyi, who is also President Putin’s special envoy on Caspian affairs, that the BTC is not a threat to Russian interests because BTC oil will go to the United States, whereas Russia’s pipeline strategy targets other markets?

Chase: We would welcome the participation of Russian energy companies in the construction of the pipeline as well as their commitment of quantities of oil to it.

Editor’s Note: This interview was conducted by Dr. Robert M. Cutler: rmc@alum.mit.edu. Cutler is a research fellow at the Institute of European and Russian Studies, Carleton University.

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Posted March 15, 2001 © Eurasianet
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