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Just When You Thought Baku-Ceyhan Was Dead and Buried (6/7)

This article continues a series begun late last year as an analysis of the then-accelerating negotiations that led to the initialling of agreements on the Baku-Ceyhan main export pipeline (MEP) at the OSCE's mid-November summit in Istanbul. There were four such agreements: a cost guarantee accord, an accord between investors and the transit states, the MEP accord itself and the construction contract. The first four articles in this series addressed the four agreements and the role played by the Azerbaijan International Operating Company (AIOC), including its component companies and BP-Amoco in particular, in the talks. The fifth looked at Georgia's demands, which by then were the main obstacles holding up to the talks. In late March, the talks were brought to a successful conclusion, with all of Georgia's demands receiving satisfaction. Therefore, it is appropriate to bring this series to a conclusion, although future columns will undoubtedly revisit the MEP and related issues. The present column traces the negotiations from early January until their conclusion, with special attention paid to Georgia's demands and how they were satisfied.

1. The Tempo of the Latest Rounds

It is easiest to conceive these negotiations as falling into three periods. First, from early to mid-January, Turkey and Azerbaijan held discussions during which they tried to make further sense of objections to the assumptions made about Georgia's position during negotiations on the Istanbul accords. (Indeed, it was their failure to anticipate Georgia's demands that made it necessary for general framework accords to be initialled rather than having the various leaders involved sign definitive and comprehensive agreements with their full names.)

Second, from mid-January through the end of the month, Turkey succeeded in meeting some of Georgia's demands and tried, with U.S. assistance, to convince Georgia to moderate others. This second period included a 10-day negotiating round in Ankara from January 19 through 28. There was then a hiatus of about two weeks while the sides took stock of what was and was not accomplished in Ankara.

The third period runs from mid-February (actually, from February 12) through March 22 and comprises three negotiating rounds: the first in Baku, from February 12 through 24; the second in Ankara, from February 26 through March1; and the third in Tbilisi, on March 21-22. The discussion below follows this periodization.

2. Early January: Turkey Fails as a Go-between

By the beginning of January, it looked like the transit tariff that Georgia would receive for oil crossing its territory remained the principal sticking point at MEP talks between Azerbaijan and Georgia. However, more was involved, although all the issues were part of the transit agreement still to be negotiated between Georgia and the pipeline investors. There were also the following questions: (1) what Georgia referred to as a possible contradiction between certain provisions of its constitution and certain parts of the MEP agreement, as discussed below; (2) the matter of land ownership and land use for the pipeline right-of-way and also the issue of who would negotiate with private Georgian land-owners over all this; and (3) fiscal policy-related financial arrangements, including provisions for environmental safeguards and responsibility for damages from force majeure.

Azerbaijan had intermittent but effectively constant communication with Turkey over these questions in the first half of January at high levels, including talks between their Presidents Heidar Aliev and Suleyman Demirel in Ankara on January 9 and 10. From this emerged Azerbaijan's understanding that Georgia's concerns included conditions for guaranteeing the security of the MEP's Georgian segment and for force majeure in Georgia.

It also became clear that Tbilisi, while demanding higher tariffs for oil transit than had been expected, was willing to take payment either in cash or in kind. In the latter instance, the oil would presumably go to Supsa, where construction of a refinery is planned. This would allow Georgia to become an exporter of value-added refined petroleum products in the Black Sea region.

On January11, following conclusion of the Aliev-Demirel meetings, Deputy Energy Minister Yurdakul Yigitguden left on a trip to Baku and Tbilisi carrying a message from President Demirel. By the time he returned to Ankara a few days later, it was clear that Turkey could not bridge the differences between Azerbaijan and Georgia. Consequently John Wolf, special advisor to the U.S. president and State Department on Caspian energy, became involved. This involvement marks the end of the first period of negotiations outlined above and the start of the second.

3. Mid- and Late January: The U.S. Catalyzes the Ankara Round

By the time Wolf became involved, the nature and implications of Georgia's demands were becoming clearer to the other participants in the negotiations. First and foremost (but not by themselves), Georgia's tariff demands were holding up the agreement between itself as a transit country on the one hand and, on the other hand, the pipeline investors. Georgia wanted the value of up to 3% of the oil transiting the country as income and/or in kind. Second, the question of responsibility for "force majeure" remained unresolved as part of the transit agreement. Third, there was the issue concerning who should obtain (and how) the land across which the pipeline would be laid. Azerbaijan maintained that in the absence of identified investors, Georgia should sign the agreement. Georgia insisted that the company implementing the project should provide compensation to those whose lands would be taken for pipeline right-of-way. Tbilisi did not want to be seen as expropriating Georgian land-owners, especially in the run-up to the country's presidential elections in April.

Moreover, Georgia insisted that all the aforementioned issues had to be resolved in accordance with the highest international environmental standards, which were incorporated into the country's agreements with the IMF and World Bank. Since Georgia's participation in agreements with international financial institutions was as a sovereign state, conditioned by provisions of the country's founding political documents Tbilisi maintained that these environmental questions were nothing less than constitutional issues on which no flexibility was possible.

In mid-January, Demirel discussed all these issues with Georgia's President Eduard Shevardnadze and told the press that he had agreed to all of Georgia's demands. Shevardnadze confirmed that Demirel had agreed to Georgia's demands on environmental issues and said that Georgia would assume responsibility for the pipeline's security in Georgia. The head of the Georgian International Oil Corporation (GIOC) stated that up to half of all transit fees received by Georgia could go to financing the security of the pipeline. It later became clear that this would include compensation to Turkey for military training, electronic surveillance systems, arms and ammunition to help Tbilisi maintain pipeline security.=20

It was thought that, with Turkey's assent, the draft of the transit agreement between Georgia and the pipeline investors could be accepted. However, Turkey's assent was not equivalent to Azerbaijan's agreement to the same terms. Baku required further clarifications of the transit conditions. So Georgia's environmental authority and the operator of oil transits across Azerbaijan and Georgia, the Caspian Transit Company (CTC), undertook to sign and finance a feasibility report. (The CTC has meanwhile refused to assume responsibility for environmental damages, as it does not manage any of Georgia's infrastructure.)

In parallel with the environmental impact report, an emergency reaction plan is being drafted to cover the whole length of the route in Georgia. Given the complicated geography of the transit route, this report may not be entirely complete until autumn. However, it is a good-faith project that will certainly be completed, and the fact that it is under way is more important than the fact that it will take several months to finish. In early February, British and German engineers arrived in Georgia to examine the proposed route for this purpose.

Such clarifications were topics of the negotiating round held in Ankara from January 19 through 28. Thus, while Shevardnadze had said after discussions with Demirel in mid-January, that Georgia would "allot land" for the pipeline, it became clear that this meant Georgian land would be made available, but not necessarily by the Georgian government. During the January round of negotiations in Ankara, the Tbilisi government agreed to participate in negotiations with private landowners, which it had previously refused to do. It still insisted that MEP investors must provide the latter compensation. The Azerbaijan side floated the idea that shareholders of the construction company MEPCO might assume this responsibility. This meant that neither the Baku government nor the State Oil Company of Azerbaijan (SOCAR) intended to negotiate with Georgian landowners.

By the time the January round in Ankara was half over, an interim solution to the security issue had been reached: The Georgian government would assume responsibility for the pipeline's security on its territory, conditional upon assistance from Turkey and other parties. (Recall that the country's two leaders had previously reached an oral agreement to this effect.) Still, the Georgian government was prepared only to provide the "juridical security" of the pipeline, but not its "material security." The former regards responsibility under law for such expenses as security patrols. The latter includes disbursements (i.e., indemnification) for the repair of physical damage to the pipeline, for example, by landslides. These have put segments of existing pipelines in the region temporarily out of operation, and their indemnification was earlier an issue for the Baku-Supsa pipeline: hence Georgia's sensitivity to the issue. Georgia still refused to take financial responsibility for repair of any damage to the pipeline through natural or industrial accidents, but it was agreed provisionally that in case of such damage a tender would be held for the pipeline's restoration.

Georgia continued to demand up to 3% of all oil crossing its territory as payment in kind for the transit tariff. Georgia was now seeking, as a negotiating ploy, to reserve the right to raise transit tariffs after the capital costs of the project were paid off. An unspoken agreement was reached to leave the transit tariff for last at the negotiations. By the end of the January round in Ankara, common oral understandings on settling the security guarantee had been achieved, such that the transit fee was in fact only issue outstanding.

4. February-March: Continuing Rounds in Baku, Ankara and Tbilisi Lead to Success

By the time the February round in Baku began on the 12th of the month, the oral understandings reached during the Ankara round in the second half of January had been put into writing. These were quickly finalized, thereby disposing of the security question along with the environmental-damage and land-compensation questions, which latter pair had likewise been previously settled through common oral understandings that took written form during the hiatus.

On February 18, BP-Amoco, the operator of the AIOC consortium, actively joined the talks as a representative of the potential pipeline investors. (U.S. government officials were also present throughout the talks.) BP-Amoco publicly voiced its satisfaction with how the environmental damage and land compensation issues had been resolved. However, it still did not undertake to provide financial guarantees to Georgia concerning force majeure. Indeed, it could not do so formally before undertaking its own negotiations with Georgia — and this it could not do until the parliaments of all three countries had approved all the terms of all four agreements initialled in Istanbul.

Still, by the time the Baku round concluded on February 24, the transport tariff was the only real issue left. It was taken up, unsuccessfully, in a follow-on negotiation round held in Istanbul from February 26 through March 1. The Istanbul round was, however, far from fruitless. It resulted in agreement on the actual route of the pipeline, as laid out by the European engineers dispatched for its survey in early February. This eliminated much of the uncertainty that had delayed earlier negotiations on other points. It was on the basis of an informal understanding about the route itself, that the written agreements of the February round in Baku had been agreed. That understanding was confirmed at the Istanbul round in late February, enhancing the trust and mutual confidence of the negotiating parties with respect to one another.

It still required a magnanimous unilateral concession by Azerbaijan's President Aliev to bridge the gap over transit tariffs with Georgia. On March 21-22, in talks with Shevardnadze in Tbilisi, Aliev agreed to give over to Georgia all of Azerbaijan's pipeline tariffs: "I took a very big risk," he explained, "and I assume full responsibility for the fact that Azerbaijan has given Georgia a gift of transit profits for the next 20-40 years." This was not, he repeated, a renunciation by Azerbaijan of tariffs due to it, but rather a gift of these tariffs by Azerbaijan to Georgia. They will amount to slightly over US$50 million per year, or a total of US$2 billion over the life of the pipeline (which was extended to 40 years as per an earlier Georgian suggestion). Georgia would receive US$0.12 per barrel during the pipeline's first five years of operation, US$0.14 during the next 11 years and US$0.17 for the 24 years after that.

5. As Things Stand Now

All this clears the way for the agreement to take final written form by the end of April, or perhaps May. Aliev's motive for his decision was the need to sign commercial contracts as soon as possible. Such contracts could not be signed until all pieces of the four framework accords initialled in Istanbul in mid-November had been spelled out in detail in writing, submitted to the parliaments of the three countries involved (Turkey, Azerbaijan and Georgia) and approved by them. Any further delay could have put off pipeline construction for a full year. SOCAR had already been said in early March that it expected the AIOC to delay development of the Azeri, Chirag and Guneshli offshore oil fields because of slow progress in the MEP negotiations.

To draw out the implications of these negotiations and agreements would threaten to double the length of this article. In fact, it would perhaps be inappropriate to label the present section as a "conclusion" because, properly speaking, it remains to draw out those implications. Therefore the present series will conclude in the near future with a seventh part, which will carry the subtitle "Conclusion and Prospects". Of course, such a subtitle should not be taken to signify either that the topic has been definitively dealt with, or that it will not recur here.

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/2000/04/just_when_you_thought_bakuceyh_5.html
First published in FSU Oil & Gas Monitor, No. 77 (11 April 2000): 4–6.

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This page contains a single entry from the blog posted on April 11, 2000 6:55 PM.

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