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Tariff Competition in the Caucasus and a Test Case for Reform in Iran

Competition among export pipeline companies in the Caucasus is heating up, even while the Baku-Ceyhan pipeline project remains on at least temporary hold. As predicted here some time ago, transit fees are beginning to play a major role in at least the short-term development of pipeline routes. This may have unexpected implications for the longer-term future, inasmuch as seven years ago no one was even thinking about Baku-Supsa.

Azerbaijan last week suggested an oil-swap deal to Kazakhstan, offering to process Tengiz oil at its Baku refinery while granting Kazakhstan a portion of the oil exported through Novorossiisk. Yet at the same time, as the Baku-Supsa export pipeline filled its first tanker, pumping of Azerbaijani oil through southern Russia to Novorossiisk was cut off yet again by the Chechens.

According to Azerbaijan, the swap deal would be effective only if Kazakhstani oil transports reached 10 million metric tons. However, the capacity of the Azerbaijani terminals that now receive Tengiz oil is less than half that. However, BP-Amoco has announced plans to build at least one more pumping station at the Supsa end of the pipeline, which alone would increase the loading capacity by 40%. If further stations are built, this could create enough capacity to bring the route near the break-even point for Kazakhstani oil passing from Baku to Supsa.

In reply, Russia has offered to decrease its tariffs, reportedly by as much as two-thirds, in order to draw oil away from Supsa to Novorossiisk.

Events this month have continued to turn in favor of the eventual construction of a Baku-Ceyhan pipeline, although contrary developments can still occur. And with world prices as low as they are, the international consortia can well continue to take their time in reaching their decision on this, which has been on hold for months. Still, as pointed out here three weeks ago, instability in the Balkans makes other export routes more desirable.

Last week, Presidents Eduard Shevardnadze and Heidar Aliev met in Moscow at a CIS summit and continued their patient work on creating the legal, economic and financial infrastructure for the construction of a Baku-Ceyhan pipeline. Meanwhile, the unexpectedly strong showing of the Nationalist Action Party (MHP) in the Turkish parliamentary elections will only give Baku-Ceyhan a push by promoting increased privatization of electric power generation and underlining Turkey's national interest in seeing the pipeline built.

Turkey's recent snub by the European Union leaves it with only the United States as a strategic partner. However, the United States has refused even to finance the Baku-Ceyhan pipeline. Perhaps the Europeans find it easier to deal with Iran than with Turkey, since Iran--not being European--will never seek admission to the EU. Perhaps also the Europeans' long memory is a disadvantage here: They seem to remember only the Ottomans and appear never to have understood Ataturk.

Though the Clinton Administration cannot unilaterally lift the sanctions on Iran--which are, after all, legislated by Congress--it is clear that Washington is experimenting with diplomatic signals to Iran. A prime example of this is the wise refusal to punish the French, Italian and Canadian firms that have recently signed petroleum production deals with Tehran. President Bill Clinton has stirred up more controversy, both in Washington and in Tehran, by stating that Iran "had reason to be angry" about its treatment by other countries and that the international community should recognize this.

Meanwhile, a major test case for President Mohammad Khatami's reform is shaping up in Tehran as a mid-level academic cleric is being brought to trial for his writings. His supporters are protesting the fact that he is being tried, without a jury and with limited public information, before a clerical court that established by the Ayatollah Khomeini but which has no legal basis in the Iranian constitution. How this case is handled will be a turning point, in whichever direction, for the current policies of liberalization (or, perhaps more precisely, "counter-reaction").

However, even if the current wave of reform in Iran is not turned back, it will require a generation or two fully to form a new population socialized towards pluralism and tolerance, not to mention a reformed legal system dovetailing with Occidental norms as do the emerging Central and East European national systems of law. The window will not stay open for a long time, however. The current generation of Iranians who have positive memories of their lives in the West in the 1970s before the revolution—those whose children are the cohort today unable to find jobs—will inevitably pass from the scene.

Copyright © Robert M. Cutler unless otherwise noted.
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This Web-based compilation: Copyright © Robert M. Cutler
URL:  http://www.robertcutler.org/blog/1999/04/tariff_competition_in_the_cauc.html
First published in FSU Oil & Gas Monitor, No. 25 (30 March 1999): 7 8.

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This page contains a single entry from the blog posted on April 27, 1999 4:59 AM.

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