Part one of this series, published after BP-Amoco made an announcement in support of the Baku-Ceyhan Main Export Pipeline (MEP), reviewed the background to that decision and its implications with regard to the four agreements being negotiated between Turkey and Azerbaijan. It also discussed what the MEP agreement and the cost guarantee agreement might look like. Part two began the discussion of the agreement between investors and transit states. This week's column is being written on the weekend preceding the November 18-19 meeting of the Organization for Security and Cooperation in Europe (OSCE) in Istanbul. It is expected that a set of framework agreements will be signed at that meeting, at least by Turkey and Azerbaijan. In anticipation of that event, the discussion of the agreement between investors and transit states will continue here, with special attention to Georgia. First, however, will come a few necessary preliminary remarks about BP-Amoco and the Istanbul conference.
BP-Amoco and the Istanbul Conference
It now appears that BP-Amoco’s position on Baku-Ceyhan goes beyond a rhetorical change of emphasis in public statements. According to U.S. Energy Secretary Bill Richardson, whom the company has not contradicted in the matter, BP-Amoco has committed not only to contributing to the oil volumes for the pipeline, but also to investing in the engineering and design of the entire line and to organizing shippers and financing for the project on the basis of equal access by all producers. Since BP-Amoco has in the past been quick to dispute incorrect press information, the absence of a denial here should be taken as a validation of Richardson’s remarks.
Moreover, the content of Richardson’s remarks should be taken as a reflection of the terms of the agreements expected to be signed between Turkey and Azerbaijan at the Istanbul OSCE summit. The precise formalities are still being worked out, but they are not really important in the long run. Perhaps Georgia will sign or only initial one or more of the agreements. Perhaps BP-Amoco, the Azerbaijan International Operating Company (AIOC) or other energy companies or consortia will later sign on to the agreements or to protocols attached to them. However, now that the political, economic and financial momentum has grown behind Baku-Ceyhan, what happens specifically at Istanbul this week will reflect more the amount of time that was available to prepare appropriate documentation than any misgivings by whichever involved parties. Of course, an upcoming major multilateral conference at the head-of-government level often does wonders for focusing negotiators’ attention.
The Special Case of Georgia as a "Transit State"
We now return to the prospective agreement between investors and transit states. As noted in the first installment of this series, conflicting reports were circulating in October concerning the settlement of cost overruns. Turkey had agreed to cover possible overruns on the Turkish segment, but the matter of how to cover overruns on the Georgian segment was still under dispute. President Heydar Aliev of Azerbaijan was quoted as saying that any excess Georgian costs would be covered by the energy consortia; the latter subsequently denied the assertion.
Part of the confusion was due to the fact, which no one wishes to discuss publicly, that what is involved for Georgia is more complicated than cost guarantees. Discussion of this issue, which involves not only politics and economics but also demography and ethnic questions, is best divided into two parts: Javakhetia and Ajaria.
Javakhetia. The issue of the route the pipeline will take through Georgia brings in other concerns. According to many observers, the Javakhetia region could pose an insurmountable roadblock. This view is incorrect.
First a few words about Javakhetia itself. Javakhetia is a predominantly ethnically Armenian region in southern Georgia. Even though volunteers from Javakhetia went to fight in Nagorno-Karabakh in the late 1980s, the region does not seek to detach itself from Georgia. Under Shevardnadze, it has obtained the cultural autonomy it sought earlier in the 1990s under President Zviad Gamsakhurdia. Under an intergovernmental agreement, for example, Armenia now supplies textbooks for schools in the region, the majority of which are taught in the Armenian language. President Shevardnadze and his Armenian counterpart Robert Kocharian have discussed proposals for Armenia to contribute to the social infrastructure of the region (electricity, road-building, etc.). Javakhetia is largely agricultural, includes many villages in rugged terrain over a mile above sea level and (partly as a legacy of the Soviet period) is generally one of the least developed regions in Georgia.
The main reason why many observers think that Javakhetia is a chokepoint for Baku-Ceyhan is the presence of Russian military bases in the region. President Shevardnadze has signed an agreement with Russia permitting the bases to remain, but this remains unratified by the Georgian parliament. However, the economic and social significance of the bases is at least as great as their political significance. Some of the "Russian" soldiers are even local Armenians who have taken temporary Russian citizenship for the purpose, thereby obtaining inexpensive consumer products and a cash income (albeit in rubles, which are widely accepted in the region).
Javakhetia is at present a part of the larger Samtskhe-Javakheti administrative region in Georgia. Even Armenia's President Kocharian does not even support Javakhetia's search for administrative autonomy within Georgia. The reason for this is a pragmatic one. Georgia is the only state bordering Armenia that does not maintain a trade blockade against Yerevan. The Ajarian port of Batumi in southwest Georgia is a principal conduit for Armenian's foreign trade today. Ajaria borders on the Samtskhe-Javakheti administrative region; any change in the latter, such as its division into separate Meskhetian and Javakhetian units, would complicate Armenia's access to the Black Sea and so to international commerce.
Ajaria.Aba Georgia has some modest energy reserves, but as far as Baku-Ceyhan is concerned it is a transit country rather than an exporter. Of course, Georgia wants to profit financially from this; however, as pointed out here two weeks ago, pipelines have to be run as service operations rather than profit centers. But the issue of exactly how the now-agreed US$2.58 per barrel tariff on the Baku-Ceyhan line will be divided up remained apparently unresolved. The reason for this can be summed up in one word: Ajaria.
Transit tariffs are indeed a genuine issue in Georgia in themselves. The present tariff that the AIOC pays to Georgia for oil moving to Supsa is a mere US$0.18 per barrel. This accord comes up for re-negotiation in 2004, at which time Georgia expects a significant increase.
Despite exaggerated claims by some interested parties, feasibility studies show that a Baku-Ceyhan pipeline through Ajaria would cost a maximum of about 4% more than a pipe through Javakhetia. Ajaria is another autonomous region of Georgia, but it is not Abkhazia. The head of Ajaria, Aslan Abashidze, recognizes the region to be an autonomous part of Georgia. Georgia's late-October parliamentary elections went forward in Ajaria, while in the Abkhazia region they did not. Indeed, the party headed by Abashidze, naturally based in Ajaria, emerged as the country's second-largest vote-getter. Yet perhaps it is no coincidence that the "cost overrun" problem of the Georgian segment of Baku-Ceyhan quietly dropped out of sight following the Georgian elections in late October, in which Shevardnadze’s Union of Citizens of Georgia party received an absolute majority of seats in the new parliament.
Ajaria is relatively prosperous today and relatively stable compared to other regions in Georgia; but Abashidze rules the region with an iron hand. Nevertheless, four million metric tons of Kazakhstani oil have already come into Georgia by rail from Baku for shipment to the Ajarian port of Batumi. And therein lies the rub: If Baku-Ceyhan is to be built through Ajaria, what sort of arrangement is necessary with Abashidze? This would be above all a financial question and could be cloaked, at least temporarily for public consumption, in the guise of "cost overruns."
Abashidze somewhat resents the investment the Georgian government has made in upgrading facilities at Supsa, in contrast with its relative neglect of infrastructure at the Ajarian port of Batumi. However, no one should be under the misimpression that there is any fundamental lack of cooperation between the two parties. The Georgian International Oil Corporation (GIOC) and Chevron are now studying plans to upgrade the existing 140-mile pipeline from Khashuri to Batumi. This could be a less expensive and more efficient way to move oil through Georgia than the existing rail route. And all decisions in Georgia concerning the implementation of oil export routes are authorized by an extraordinary high-level state committee chaired by Shevardnadze himself.
But That’s Not All
As this article goes to press, there are rumors that a framework agreement, at least, for the under-sea gas pipeline from Turkmenistan to Turkey will also be signed in Istanbul. Future columns in this series will deal with the puzzling issues of why Turkey seems like going on a buying spree of natural gas from Russia, Turkmenistan, Azerbaijan, and Iran and what it will do with it all; the consequences for regional energy cooperation of the decapitation of the Armenian parliamentary leadership by assassination in late October; and also Iran’s decision to slash its "netback cost," which is the service fee it charges to such countries as Kazakhstan for oil swaps, as an unanticipated effect of the Baku-Ceyhan accord.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 58 (14 November 1999): 4–6.