In mid-June, I wrote that "if and when construction begins on Baku-Ceyhan, it will be due to a major shift in a variable whose immutability everyone now takes for granted." Construction has not yet begun, but such a variable has shifted. That variable is the attitude of BP-Amoco, the largest shareholder in the Azerbaijan International Operating Company (AIOC), which on October 19 stated that "the Baku-Ceyhan pipeline is a strategic transportation route that should be built."
This does not seem very different from its mid-September position that "we sympathize with the strategic and geopolitical considerations but at the end of the day this has to be a commercial investment that is assessed as such." However, the October 19 statement goes on to say that BP-Amoco is now "willing to provide a lead to ensure that companies work with governments and multilateral financial institutions to find a way to finance such a pipeline." (Turkey's Energy and Natural Resources Minister Cumhur Ersumer later remarked that he had been informed of this shift a week previously and was waiting for the public announcement.)
This is what the French call the petite phrase that makes the difference: "willing to provide a lead." It still does not mean that the Baku-Ceyhan main export pipeline (MEP) will be built. But it tilts the AIOC from neutrality on the issue—meaning activity, meaning advocacy. This column examines exactly what this small but potentially significant shift means, and what it entails.
On September 21, at the beginning of the round of Turkish-Azerbaijani MEP negotiations just concluded, U.S. Special Ambassador John Wolf increased pressure on the oil companies. Wolf stated: "Now the ball is squarely in the AIOC's court. It has to stop using the process of negotiations to block the solid test of Baku-Ceyhan in the market place." When asked about the AIOC's concern that oil flows would be insufficient, Wolf answered that other producers in Azerbaijan, as well as in Kazakhstan and Turkmenistan, should be taken into account. In the end, this is what the AIOC has done, and it has reached the conclusion that it is no longer out of the question that the Baku-Ceyhan MEP could be commercially justified.
"To make such a determination," Wolf explained, "it is necessary to enable a successful conclusion of the Turkish-Azerbaijani negotiations, and this is just what AIOC has taken steps to do." What steps were these, taken as early as September 21? Probably Wolf was referring to BP-Amoco's naming of a different representative to the talks, replacing one whose lack of enthusiasm, inherited from the situation in 1997, was no longer appropriate. It is perhaps no coincidence that a month later Ersumer implied that this personnel replacement in no small measure contributed to (in Wolf's words) the "extraordinary" progress over the month-long talks.
Vitaly Beglyarbekov, deputy chief of the department of overseas investments at the State Oil Company of Azerbaijan (SOCAR), was entirely correct to state on October 20 that "[there] are not many pipelines in the world that cross three countries and, in fact, there are no regimes to control the passage of such pipelines. Therefore, the work that we are doing together with our partners is ... unprecedented." This accounts in part for the length of the negotiations.
Beglyarbekov expects the project to begin implementation in the year 2000. Ersumer projects 36 months for the feasibility and other technical studies to be completed, and another 36 months for construction. The Baku-Ceyhan MEP would then come on line in 2005 (perhaps 2006), significantly earlier than the 2008 date projected by BP-Amoco only several weeks ago as the earliest possible.
The four agreements under negotiation are: (1) a cost guarantee agreement, (2) an agreement between investors and the transit states, (3) the MEP agreement itself, and (4) the construction contract. These are naturally interrelated in a complex and inseparable ways. Also, formally speaking, they are bilateral intergovernmental agreements. Nevertheless, it is appropriate to observe that the first basically concerns the responsibilities of governments; the second, those of governments and investors; the third, those of governments, investors and the MEP management and operating authority to be created; and the fourth, those of the last three plus the contractors. The remainder of this week's article deals with the MEP agreement and the cost guarantee agreement. The other two will be addressed in the next installment.
The MEP agreement
Let me address the MEP agreement first. A most interesting report, ignored in much commentary, was carried by Nikkei. According to this, Nihon Keizai Shimbun in its morning edition of October 21 reported that an international consortium has decided to build a Baku-Ceyhan pipeline by 2005 and that it would be used to move large volumes of oil destined for Japan.
This report is in line with another "petite phrase" from Wolf, this time in a speech made a week earlier at the KIOGE-99 conference in Kazakhstan. "Some companies," he said, "seem to argue [that Baku-Ceyhan is] non-commercial perhaps because they think that the pipeline will be the property only of AIOC companies, perhaps because they think they are the only companies with volumes to commit to a Ceyhan route." Putting the phrase "perhaps because they think they are the only companies with volumes to commit to a Ceyhan route" together with the Japanese report that a new consortium will be formed for Baku-Ceyhan, of which the AIOC will be a member, leads to the conclusion that progress in identifying non-AIOC oil for the MEP has been made, notwithstanding the TengizChevroil chief's public declaration that he for one is dedicated to the Caspian Pipeline Consortium (CPC) project to build a pipeline across southern Russia to Novorossiisk.
The source for this report could have been no other than Itochu, an affiliate of which owns just under 4% of the AIOC. According to this report, "A new international consortium will be created in the near future with AIOC at its core." The cost estimate given in this article is US$3 billion, and it is stated that "project financing will be used for about half of the funds." It sees production increasing from the present 100,000-120,000 barrels per day to 800,000-900,000 bpd, of which 60,000 bpd would be shipped to Japan. We may assume that this is a reference to the terms of the third bilateral intergovernmental agreement under negotiation between Turkey and Azerbaijan, the one on the MEP itself.
If the AIOC is not the only consortium to export through the MEP, then it is natural to establish a new consortium, of which it would be a member, for the MEP itself. Indeed, there is nothing to exclude the creation of separate MEP entities to build the pipeline and to manage it after construction. This may even be advisable, with the latter growing out of the former but not restricted by its experience. Just as the skills of a professional revolutionary are not those needed by the head of a post-revolutionary regime, so not all the lessons learned in constructing the MEP may be knowledge useful for its management and operation.
The Cost Guarantee Agreement
SOCAR head Natik Aliev, interviewed on ANS-TV in Baku early on October 19, commented on his talks with Ersumer, saying that the "major economic problem" (i.e., cost guarantees) had been settled, and "it is impossible to say that there are different points of view regarding this problem between Turkey and Azerbaijan." Of course, if the two sides agreed that disagreements remain and must be resolved, it would also be "impossible to say" that they have "different points of view."
After Ersumer arrived in to discuss yet again the commercial aspects of MEP, Azerbaijani President Heidar Aliev was reported to have remarked that the real evaluation of the project investments would only be possible after there was the feasibility report. That in turn depended upon the Turkish side providing "certain financial guarantees," and that "it is therefore requested that Turkey should commit itself to covering any possible excess costs." This does not make it sound like the issue was definitively resolved.
One issue that was resolved, however, was the tariff per barrel, which is now fixed at US$2.58 for the entire route. This tariff had been a big sticking point, especially in view of the question of volume, and attempts had been made to innovate formulae whereby this tariff would have been a function of oil being pumped or total oil pumped. These formulae in turn would have led to BP-Amoco's earlier emphasis on the need for guarantees of volume of throughput.
On Thursday, October 21, a report was disseminated in the media that according to the Azerbaijani president and BP-Amoco had agreed to guarantee the extra costs over US$1 billion for construction of the Azerbaijani and Georgian sections of the Baku-Ceyhan pipeline. It was also reported that BP-Amoco's consent was contained in a letter from BP-Amoco chief Sir John Browne to President Aliev. The local office of BP-Amoco/AIOC denied that such a letter had been sent or such cost guarantees given. The vice-president of BP-Amoco, Tony Hayward, visited Baku on October 19-21 and met with SOCAR's president. However, Hayward brought only an oral message from Browne, not a written one, and he did not meet Heidar Aliev.
President Aliev did make such a statement, but he did not make it to the media. Rather, he made it during a private meeting with U.S. presidential advisor Stephen Sestanovich. He also said that Turkey had agreed to cover cost overruns above the US$1.4 billion estimate on the Turkish section of the line. On October 18, he had promised Turkish President Suleyman Demirel that he "would convince the oil companies to pay the costs if the line was more than US$1 billion in Georgia and Azerbaijan." Aliev's statement is revealed in this light as an attempt to influence AIOC members other than BP-Amoco.
But the supposed misunderstanding is still more subtle than that. When the Baku-Supsa line was originally renovated a few years ago, there had been significant cost overruns that the oil companies had picked up. Perhaps Aliev has a letter from BP-Amoco stating that they will again pick up cost overruns from the expansion of the Baku-Supsa line. Such a statement would refer only to the increase of the line's capacity over the next few years, without reference to Baku-Ceyhan. However, it is easy to believe that there was a misunderstanding between Aliev and Sestanovich, whereby the latter somehow understood a reference by Aliev to the oil companies' handling of Baku-Supsa cost overruns, to refer to cost overruns for the Azerbaijani and Georgian segments of the Baku-Ceyhan line.
How willful the misunderstanding would be, and who was responsible for it, are no doubt now being clarified by BP-Amoco and the office of the president of Azerbaijan.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 55 (26 October 1999).