The Azerbaijan International Operating Company (AIOC) has sought for nearly a decade to develop for export Azerbaijan’s “Contract of the Century” oil fields, i.e., the major offshore deposits in the Azeri-Chirag-Guneshli sectors. As it was determined that the Baku-Ceyhan pipeline would go through Georgia, it acquired the name of the Baku-Tbilisi-Ceyhan route, or BTC for short. Only a few weeks ago, the AIOC announced its definitive decision to proceed with the construction of the BTC line, now expected to open in late 2004 or early 2005.
In designing a Main Export Pipeline for Caspian oil, the route from Baku to Ceyhan was one of the first contenders. Throughout the 1990s, an overwhelming majority of observers expressed various degrees of skepticism that such a pipeline would ever be constructed. Many objections were raised from a distance, variously on financial, economic, political, strategic and polemic grounds. However, those people whose incentive structures motivated them to give the question sustained practical attention succeeded against the skeptics.
On 19 October 1999 BP-Amoco, AIOC’s operator and leading shareholder changed the playing field with a statement affirming that "the Baku-Ceyhan pipeline is a strategic transportation route that should be built." BP-Amoco further expressed a willingness to “provide a lead to ensure that companies work with governments and multilateral financial institutions to find a way to finance such a pipeline." On 18-19 November 1999, the OSCE Istanbul summit saw agreements initialed by the heads of state of Azerbaijan, Georgia and Turkey, representing the framework accords for the BTC pipeline.
During subsequent discussions, the transit agreements presented problems, especially with respect to Georgia. Problems centered on responsibility for natural calamities ("force majeure") damaging the pipeline, financial compensation to the thousands of landowners through whose property the pipeline will pass, and the issue of environmental security and ecological conservation. Those issues were resolved in early 2000 through three rounds of negotiations. Intense negotiations in early 2000 helped solving these problems. Eventually, the deal was clinched after President Aliev decided Azerbaijan would forgo its right to collect transit fees on the pipeline, a magnanimous gesture in Georgia's favor that guaranteed the necessary breakthrough.
It had been thought that the Trans-Caspian Gas Pipeline (TGCP) from Turkmenistan via the Caspian seabed, Azerbaijan and Georgia, to Erzurum would provide savings to the BTC construction through jointly managed and maintained infrastructure along closely parallel routes. However, the discovery of Azerbaijan’s large offshore gas-and-condensate field at Shah-Deniz changed this equation, and a dispute arose between Turkmenistan and Azerbaijan over the volumes to be allocated between the two countries.
In late 2000 and early 2001, the BTC’s six-month preliminary engineering study was completed, and was followed by a twelve-month detailed examination of specific engineering issues. Finally, just a few weeks ago, AIOC’s took the decision to actually construct the pipeline.
The significance of the BTC pipeline is twofold. It holds general lessons for the strategy of international energy development in the twenty-first century, and also has significance for the evolution of geo-economic relations in the South Caucasus and beyond. The framework accords agreed in Istanbul in November 1999 included four separate agreements, necessary for so complex a project: (1) a cost guarantee agreement, (2) an agreement between investors and the transit states, (3) the pipeline agreement itself, and (4) the construction contract. These agreements were later ratified by the national parliaments of all three countries, giving them force of law in their respective domestic political and economic systems, as well as establishing their international commitments as binding upon the signatories, as if these were intergovernmental treaties. The BTC pipeline is the first in the history of the industry framed by so complex a series of agreements, necessary to provide guarantees for transit across three countries, that has been successfully negotiated.
This success provides three lessons for energy development strategies in the twenty-first century. The first lesson concerns the necessity to coordinate production and pipeline development. Financiers are not concerned with the problem of coordinating timing of production and pipeline development. The only way to solve such problems is to involve shippers as partners. 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 whether the field is large and mature or immature and partially developed with satellites. 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 geo-economic significance of the BTC comes not only in its helping to cement the East-West transit corridor across the South Caucasus, but also in the further work now ongoing to take volume from Kazakhstan and possibly Turkmenistan into the pipeline as it ramps up to maximum throughput. There is work underway, in particular, to develop an intergovernmental agreement between Kazakhstan and Azerbaijan to cover such an arrangement, including tax rules, the move away from monopoly towards the market in the provision of related services, and also transparency of pipeline rules, regulations for calculating costs and defining the supporting costs, and the provision for barging arrangements.
Most significant, and generally overlooked, is the fact that events have promoted a rapprochement and nascent dialogue between the European Union and the United States, concerning international energy development policy. The EU had opposed the Trans-Caspian Gas Pipeline (TCGP) project, promoted by the U.S., which would have taken Turkmenistan's natural gas across the Caspian Sea floor to Azerbaijan, from there to go through Turkey to Southern Europe. Such a pipeline would have run parallel to the BTC, so contributing to the reduction of infrastructure and maintenance costs for both lines. The TCGP foundered on Turkmenistani President Saparmurad Niyazov's refusal to compromise on important international payment details and also on his sense of personal-prestige competition with Azerbaijani President Heydar Aliev.
The success of the BTC negotiations themselves and the pipeline’s prospective implementation are due to new organizational methods of management and work that the international energy consortia have invented and implemented. This flexibility, plus the awareness that fundamentals either do not change or change slowly, is what allowed those who have been most deeply concerned with the BTC to properly evaluate the once-rampant skepticism about the project. Gas from Azerbaijan's Shah-Deniz field now will follow the route from Baku to Ceyhan.
Both the EU and the U.S. support the Shah-Deniz project, and they have together launched a series of broad consultations over international energy development policy, with special attention to the Caspian Sea basin. At the same time, Russia has come to appreciate that the development of the BTC pipeline, and of other export routes circumnavigating Russian territory, are not by themselves fundamentally contrary to Russia's basic national interests, much as its commercial and financial interests may wish to promote pipeline routes crossing Russia itself.
First published in Central Asia – Caucasus Analyst, vol. 3, no. 22 (24 October 2001): 3–4.