It was announced recently that Georgia will sign this week a host government agreement with private investors in the oil pipeline pipeline from the Azeri capital Baku, through the Georgian capital Tbilisi to the Turkish Black Sea port of Ceyhan. This agreement represents the final piece in the legal framework for the Baku-Ceyhan Main Export Pipeline (MEP). Accordingly, I bring the series I began late last year on this topic to a conclusion, although future columns will undoubtedly revisit the issue.
Aside from the level of the transit tariff, there were three main concerns on the Georgian side. First, Georgia should not be responsible for natural calamities ("force majeure") that may damage the pipeline. Second, the private investors should negotiate with private Georgian land-owners concerning compensation for land needed for the pipeline's right of way. Third, matters of environmental security and ecological conservation should be resolved in accord with European standards invoked in Georgia's sovereign obligations to international financial institutions. These were all resolved in intricate detail over the course of the first three months of the year. They required actual route selection and surveying. This was accomplished by European engineers as the negotiations were ongoing. Then the tariff issue was resolved by a magnanimous unilateral gift to Georgia, by Azerbaijan's President Heydar Aliev, of all of his country's s pipeline tariffs over the life of the project, now extended to forty years.
1. Once More on the Trans-Caspian Gas Pipeline
Not so long ago, when oil prices were lower, it had been thought that the Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan under the Caspian Sea to Baku, then through Georgia into Turkey, would provide savings to MEP construction through the possibility of jointly managed and maintained infrastructure along closely parallel routes. The discovery and proof of the large gas-and-condensate field at Shah-Deniz changed this equation. Azerbaijan wanted now to put this gas into the TCGP on its way to Turkey, and a dispute began with Turkmenistan over the volumes to be allocated between the two countries. Earlier this year, President Niyazov of Turkmenistan, accusing the United States of supporting Azerbaijan's request for half the TCGP volume (although the Russian press reported that the U.S. proposed a 20 per cent compromise), turned to Gazprom to seek a deal, but then turned around again to announce that he had reached an agreement with President Aliev for Azerbaijan to take one-sixth instead of one-half.
In Baku it was confirmed that a telephone conversation had occurred between the two presidents and that an agreement had been reached, but the proportions were not confirmed. President Aliev himself said that he would accept President Niyazov's invitation to Ashgabat for late April, if the conditions of the deal were agreed before then. It was anticipated that President Niyazov would undertake to work out those conditions with President Aliev in the meantime, particularly since the Turkemenistani side had assumed the obligation earlier this year, to fine-tune the TCGP deal after negotiations reached stalemate in mid-February in Ashgabat. This explains the disappointment on all sides that President Niyazov chose not to attend the summit of Turcophone countries held in Baku in early April. President Aliev in particular was reported to be privately furious, apart from Niyazov's mid-February insistence in Ashgabat that the Kyapaz field (part of the Azeri-Chirag-Guneshli development by Azerbaijan International Operating Company, AIOC) really belonged to his own country. This claim was a matter that all sides had considered resolved at the mid-November OSCE summit where the framework MEP accords had been initialled by all concerned, including President Niyazov himself.
In February/March, the Azerbaijani side had stated, on the basis of the Shah-Deniz find, that it was perfectly content to proceed with construction of a gas pipeline through Georgia to Turkey, irrespective of Turkmenistani participation and in the absence of an under-sea TCGP. The extent of Shah-Deniz resources leave no doubt as to the commercial viability of such a project. The companies in the Shah-Deniz consortium, which is led and operated by BP-Amoco separately from their role in the AIOC, were especially supportive of such a plan. They have now announced that they are realizing this intention. A pipeline to Turkey will now be built from Baku for the Shah-Deniz gas, and Turkmenistan is left out in the cold. The calculation appears to have been that President Niyazov's mercurial personality--some would say unpredictability--makes it desirable to proceed with what is feasible without him.
What is notable in this decision is Turkey's acquiescence in it. For Turkey had long stated that Turkmenistani gas was a condition for its accepting gas that arrived through the TCGP. Of course, a gas pipeline starting in Baku is not trans-Caspian. Perhaps the Azerbaijani and Turkish sides reached agreement on this at the Turcophone summit in Baku, from which President Niyazov absented himself. Niyazov had visited Baku a few years before and given the impression earlier this year, that it was President Aliev's turn to be his own guest in Ashgabat. Therefore it cannot be excluded that he had earlier given the impression of an intent to attend, only to pull out subsequently under the return-visit pretext, in an attempt to pressure the Azerbaijani side. This would have put Aliev in the role of supplicant going to Ashgabat, accounting for his personal ire at Niyazov's failure to attend the Baku summit.
2. Where the Baku-Ceyhan MEP Now Stands
Where does this leave the Baku-Ceyhan MEP for oil from the AIOC project? The condensate liquids in the Shah-Deniz deposit, estimated at 500 million barrels, can be put into the MEP so as to improve quality and increase quantity of throughput. Moreover, it is possible that the Shah-Deniz field has an oil rim below its gas columns. If this were so, then by itself it could possible resolve the supposed MEP throughput shortfall. It is correct to speak of a "supposed" shortfall, because in 1998 the AIOC had set a figure of 800,000 barrels per day (bpd) as the level of throughput necessary to make the pipeline commercially feasible. Later, when the logistical and legal difficulties to the MEP's construction looked more likely to be resolved, this figure was raised to one million bpd, but the basis for the new estimate was never made public.
There is great anticipation that tests in the East Kashagan field by the Offshore Kazakhstan International Operating Company (OKIOC), soon to be announced, will reveal voluminous reserves. Broad hints to this effect have been circulating publicly and privately for over a week. The likelihood of such reserves is enhanced by the recent confirmation of the production potential of the North Kashagan field offshore from Russia, also in the North Caspian. Confirmation of reserves in the East Kashagan field could definitively resolve the MEP throughput issue. However, several weeks ago Iran struck an agreement with a French firm to construct a pipeline from the Iranian port of Neka on the Caspian, to Teheran. This would increase the volume of Kazakhstani oil imported by Iran and swapped for Iranian exports from the Persian Gulf. Although U.S. sanctions against Iran have not been lifted, Washington has not enforced penalties against foreign firms signing contracts with Iran. This raises the prospect of U.S. sanctions being lifted to allow construction of a pipeline from Kazakhstan, through Turkmenistan and Iran, ending on the Persian Gulf.
Even though the present series of articles on the Baku-Ceyhan MEP is now concluded, I do not doubt revisiting MEP-related issues in the near future, in the context of discussing these recent and anticipated finds in the North Caspian.
First published in FSU Oil & Gas Monitor, No. 80 (2 May 2000): 3 5.