A sensational report has arrived that Moscow may be altering its policy on the Baku-Tbilisi-Ceyhan (BTC) export pipeline, so as to permit Russian companies to participate in its construction and operation. Russia's foreign minister Ivan Ivanov is said to have stated a few days ago in late May, that although in his judgment BTC will not be economically viable, Russian companies would not be blocked from participating in it. However, now that Caspian Pipeline Consortium (CPC) from Kazakhstan is scheduled to arrive later this year in Novorossiisk, it is clear that high-ranking Russian officials are take seriously the environmental objections from Turkey concerning the flow of excessive quantities of oil through the Straits.
1. A blast from the past
In the past, before Vladimir Putin became president, the Russian major LUKoil had made very favorable noises about BTC. At a semi-public luncheon during a day-long conference in New York City in summer 1998, LUKoil chief Vagit Alekperov even declared, with the Turkish energy minister sitting ten feet away from him, that BTC was a good idea and that LUKoil favored it. A report of those remarks was published two years later in June 2000, after Putin had been elected president.
Within a week thereafter, Alekperov made another public statement, this time to the Russian press, to the effect that LUKoil had no intention whatsoever of participating in the BTC project in any way. It would be interesting to speculate whether Alekperov's second statement was the result of any high-level political reaction following publication of the report of his first statement. But the point now is that the pendulum seems to be swinging back the other way again.
Viktor Kalyuzhnyi, President Putin's special envoy for Caspian affairs, has several times in the past said that Russia would not oppose any pipeline that is economically profitable. Yet he has also made other statements contradicting that position. It indeed seems that what he says on any given day depends on two factors: whether any pertinent foreign leaders are visiting Moscow (the most striking recent reversal came during the Iranian president's sojourn with his Russian counterpart), and where on that day Kalyuzhnyi is geographically located himself.
2. Interpretation and misinterpretation
Analyses of events would be much more nuanced if observers would follow the simple method of differentiating such statements and announcements according to their immediate audience, intended audience, and any extrinsic purpose that the speaker might have. As an example of the last of these, it is not widely realized, for example, that one of Kalyuzhnyi's jobs is to keep the Russian pipeline system filled to capacity. This by itself necessarily influences his public statements as well as his private views.
Such interpretive techniques represent nothing more than the sensitivity with which historians are trained to handle source documents. Historians of the contemporary era would do well to recall it, regardless of their professional disciplinary training (if any). Too much is taken and repeated at face value. This accounts for much, but by no means all, of the confusion surrounding energy and pipeline development issues in the Caspian region.
3. Baku-Tbilisi-Ceyhan still on course
Meanwhile, as expected, the BTC sponsor group has provisionally authorized undertaking of the second stage of the engineering at a cost of $150 million and lasting through mid-2002. In late April, it was bruited that the first stage of the engineering study, due for completion in May, would arrive at a cost estimate of $3.1 billion. This would be somewhat above the projected low estimate of $2.7 billion, and over 25% over the Turkish firm Botas's earlier estimate of $2.4 billion.
However, it would be considerably below the higher ranges that were suggested in the past. In this connection it is noteworthy that BP, which operates and leads AIOC, has recently announced plans to invest $8-9 billion in oil and gas projects in Azerbaijan over the next four years. This figure includes $6 billion for the first state of development and oil export from fields being managed by AIOC.
As a highly placed industry executive has put it, the first stage is like going over the ground of a tract of land on which you intend to build a house. In that stage, one draws sketches and works out the approximate cost of what is sought to be built. The second stage involves the drawing-up of detailed engineering plans and costings. The analogous stage in housing construction is bringing in the architects and deciding where the drains and power lines go. However, one proceeds with the second stage only if one is rather certain that the house should be built. The third phase, in the case both of the house and of the pipeline, is the actual construction.
Going on to the second phase is an indication of strong confidence in the success of the construction project. This is also the stage at which additional sponsors, beyond the original sponsor group, are sought. In mid-April, TotalFinaElf began talks in Baku with a view towards becoming a member of the sponsor group for the BTC. The State Oil Company of the Azerbaijan Republic (SOCAR) has also been in talks with Chevron for sale of 10% to 20% out of the 50% share SOCAR itself holds.
4. Next steps for Baku-Tbilisi-Ceyhan
At the end of the month there was also some apparent but no real ambiguity over Kazakhstan's commitment to the line. The apparent ambiguity arises from the fact that Kazakhstan needs multiple pipelines to get its petroleum to market in the early 21st century. However, statements in favor of using the Caspian Pipeline Consortium (CPC) project get interpreted in the press and even by knowledgeable observers as excluding other pipelines such as BTC. Even statements such as that by deputy prime minister Vladimir Shkolnik, to the effect that Kazakhstan will begin to use BTC only after 2005, get spun against the pipeline, because of a false interpretation that oil from Kazakhstan is needed to make the BTC commercially viable.
The pipeline remains, however, something short of a sure thing, and much may hinge on the final cost estimate, which can be pinned down only through the detailed engineering study planned for the second phase. It will be conducted by the German company PLE, which is already familiar with the terrain and project from previous informal involvement during the hammering out, in early 2000, of the details of the BTC framework accords signed in Istanbul at the November 1999 OSCE summit.
Nevertheless, the puzzlement and incredulity of some industry observers is difficult to understand. The price of oil has simply risen since skepticism was in vogue in the late 1990s, and moreover the recent fall in value of the Turkish lira can only make the pipeline less expensive to construct, if the contractors and subcontractors are wise enough to make wide use of local labor and local raw materials for construction. Even the European Bank for Reconstruction and Development (EBRD) has taken an official interest in the possibility of a loan to underwrite BTC's construction.
5. The Caspian Pipeline Consortium: Almost ready for prime-time
The throughput of Kazakhstani oil via the CPC line literally halted on the Russian border earlier this month. Although the absence of a customs arrangement for its transit across Russia was invoked as the reason for this, the underlying problem is that an agreement had not yet been reached concerning compensation how to compensate those who put higher grades into the pipeline the dilution of quality as a result of lower grades being added downstream. This was known to be an unresolved issue before CPC construction began in earnest some months ago.
The various Russian provinces along the route have wanted a quota share of the pipeline and the right to contribute to the flow. The issue in fact delayed the onset of construction. It now turns out never to have been resolved. The consortium evidently felt that if the pipeline were made a fact on the ground, then political forces would compel a resolution. This appears to have been a good bet, as an agreement in principle on a methodology for resolving the differences has been reported, although the parameters for the calculations are still at issue. The CPC line from Tengiz began filling in late March. Officials are still optimistic that the first tanker loading in Novorossiisk will be accomplished by the end of June.
6. Blue Stream, Shah-Deniz and the Trans-Caspian Gas Pipeline
It seems is unlikely that the investigations into corruption in Turkey will slow down the completion of the Blue Stream pipeline. The project is already somewhat behind schedule due to technical problems and it is possible to suppose, from project documents, that this could constitute a legal basis for Turkey's cancellation of the project. However, at present nothing short of a crisis that challenges the actual parliamentary majority of the ruling coalition in Ankara is likely, on the political side, to affect the rhythm of Blue Stream's completion.
To suspend Blue Stream would have to be a political decision. The circumstantial evidence about Botas is unlikely by itself to catalyze any significant effect on Blue Stream, unless a link is proven to governmental corruption. Even then, it is not certain whether there are political mechanisms available in Turkey to halt Blue Stream, because it is not clear where the ruling coalition would be parliamentary weakened. Such pressure would have to come from the President or, more likely, the National Security Council. But the latter appears inclined to leave the working-out of this matter to the politicians. Thus the Blue Stream project also looks set at present to be completed, despite recent delays for technical reasons concerning the inferior quality of pipes delivered for laying across the bottom of the Black Sea between Russia and Turkey.
The pipeline from Azerbaijan's offshore Shah-Deniz deposit to Turkey is now set to go ahead, with the ratification of necessary contacts under way or already achieved by the respective national parliaments. And to round out the inventory of major gas pipeline projects, the Trans-Caspian Gas Pipeline (TCGP) now looks dead beyond resuscitation.
The self-organization of the Caspian energy pipeline system—really the system of the "meta-region" of the Caspian/Black/Mediterranean Sea basins—continues apace. Iran remains largely left out of the Caspian game but looks set with its projected exports to influence energy markets in South and Southeast Asia.
Turkmenistan remains dependent upon the Russian pipeline network, and this has assisted a modest re-integration of a Russocentric energy sphere as Ukraine continues its historic dependence on Turkmenistan's natural gas. Russian energy trusts have been extending their reach into Ukraine and Kazakhstan, but this has not yet influenced pipeline selection although the broader geopolitical and geo-economic import should not be underestimated.
More broadly still, Russia has just signed a project for construction of a pipeline into China and is in continuous high-level talks with the European Union concerning long-term gas exports to Europe. As energy pipeline networks develop in the twenty-first century, it will be seen in retrospect that the stakes in the Caspian region during the first decade after the disintegration of the Soviet Union have played a determining role in the evolution of subsequent natural resource flows and their concomitant political alignments.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 134 (29 May 2001): 4–6.