This week’s commentary continues the analysis begun last week, of the terms and prospects for agreement on construction of the Baku-Ceyhan main export pipeline (MEP). The column last week discussed two of the four agreements being negotiated: the MEP agreement itself and the cost guarantee agreement. This week, I begin discussion of the prospective agreement between investors and transit states.
Analysts are frequently cited in the press as saying that the prospective conclusion of the four MEP accords does not guarantee that the Baku-Ceyhan pipeline will be built—first because BP-Amoco’s support for it does not guarantee it will be financed, and second because the necessary throughput volumes to guarantee "commerciality" have not been identified or committed. These obstacles must be evaluated in the light of lessons from energy development strategies in the Caspian basin during the 1990s. There are three such lessons.
The first lesson concerns the necessity to coordinate production and pipeline development. There are signs that the AIOC (Azerbaijan International Operating Company) has learned this lesson. For example, the development plans for the Azeri, Chirag and deep-water Guneshli (ACG) concession in Azerbaijan’s section of the Caspian Sea are being closely coordinated with the MEP commissioning timetable. But that is not all. Financiers are not concerned with the problem of coordinating timing of production and pipeline development. The only way to solve resolve such problems is to involve shippers as partners. The negotiations over Baku-Ceyhan appear to take account also of this.
Second, the fact that consortia have many different members means that it is hard for them to act on a financing strategy. Such strategies must differ according to the nature of the field. For example, in large mature fields, which are still essential to the country’s economy and where there is an established skill base, the strategy should be to address fixed costs and to optimize the infrastructure. In immature, partially developed fields and satellite fields, it is still necessary to establish a good legal framework and reasonable tax law. Indications are that the AIOC has learned this lesson in Azerbaijan as well.
Third, if a pipeline goes through two or more countries, questions arise about how to split up financing. The answer today is to split the project into segments, each of which is justifiable on its own merits. The discussions about expanding the existing Baku-Supsa pipeline and integrating it into the MEP make it clear that this lesson too has been learned in principle, even if tactical differences remain among the parties on how to arrive at the desired goal.
It would be unreasonable for anyone to suppose that BP-Amoco can single-handedly bring these matters to a successful resolution. Yet skeptics today imply that the company's failure or inability to do so casts doubt on the entire project. But BP-Amoco is doing what it can. Even its insistence on U.S. participation in securing financing is merely a recognition of the complexity of the undertaking, which by its nature requires the involvement of national and international financial institutions.
Regarding guarantees of throughput volume, BP-Amoco has publicly announced that it will work also with Kazakhstan and Turkmenistan to obtain the necessary volume. Kazakhstan has expressed its willingness to see some of its oil transported westwards along a Baku-Ceyhan line. Also, a company official close to the negotiations told the Caspian Times that a joint venture between BP-Amoco and the state petroleum companies of Azerbaijan, Georgia, and Turkey should undertake to identify deposits and commitments sufficient to justify Baku-Ceyhan on a commercial basis.
One assumes that such information will not be regarded as secret and proprietary. A certain degree of transparency is necessary at these final stages of the negotiations in order to ensure the mutual trust necessary to their successful conclusion. This is, indeed, all the more the case, insofar as in the last week it is the Turkish side and not the AIOC that has slowed down the negotiating process. Observers close to the scene impute this to the Turkish side's attitude that if the AIOC likes the deal so much, then there must be something wrong with it.
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First published in FSU Oil & Gas Monitor, No. 56 (2 November 1999): 7–8.