BTC project crisis and the Caspian Basin energy game

Azerbaijan's leaders and the executives or international energy companies are currently concerned about the future of the Baku-Tbilisi-Ceyhan pipeline (BTC) and the Nabucco gas pipeline project.

The BTC connects Azerbaijan with Turkey and crosses Georgian territory where the recent conflict between Russia and Georgia took place. The Nabucco project was designed to export gas from Turkmenistan to the Mediterranean Sea. It would require building a separate pipeline across the Caspian Sea bed, which has not been divided by the sea's five littoral states: Russia, Azerbaijan, Kazakhstan, Turkmenistan and Iran.

Both projects were very expensive and the reason for their existence was a political rather than an economic one. They would cross Georgian territory and would bypass Russia and Iran, the two main US rivals in the region.

In November 2003, Washington sponsored the so-called "Rose Revolution" in Georgia, which helped Mikheil Saakashvili rise to power. The new pro-US government was commissioned with the mission of permitting the construction as well as protecting the BTC pipeline. In Washington, experts pointed out that the United States had to take control of Georgia if it wanted to guarantee the viability of the pipeline.

After the war broke out, shipments of oil and natural gas through the pipelines crossing Georgia were suspended. A statement issued by the British energy giant BP, which owns 30 percent of the BTC, said the pipelines have not been damaged, adding that energy flows would remain suspended until the "the situation in Georgia normalizes", which is difficult taking into account that tensions between Moscow and Tbilisi remain very alive, especially after the Russian recognition of the independence of South Ossetia and Abkhazia. Oil flows via the BTC stopped even before the outbreak of the Georgian-Russian conflict, due to an explosion at a compressor station in Turkey for which Kurdish separatists claimed responsibility. Some suspect that the pipeline could easily become a target for terrorist groups.

Azerbaijan's state energy corporation, SOCAR, also announced that it had temporarily halted oil deliveries to Georgia after an explosion damaged a key rail bridge there. Georgia accused Russian troops of blowing up the bridge, which connects Azerbaijan to Georgian ports and is a short-term alternative to the BTC for the export of Caspian energy supplies to Western markets, but Russia strongly denied any involvement. Actually, production at oil and gas fields in Azerbaijan has been impacted by the Georgian conflict, but state officials have not specified the current volume of production.

Yet, the problems for the Baku-Ceyhan pipeline do not stop here. Kazakhstan, the biggest oil and gas producer in the Caspian Basin, decided to support Russia over the conflict with Georgia. At a meeting in the Tajik capital Dushanbe on the sidelines of the annual summit of the Shanghai Cooperation Organization (SCO), Kazakh President Nursultan Nazarbayev told the Russian President Dmitry Medvedev that Russia could count on Kazakhstan's support during the crisis. On August 19, Kazakh Foreign Ministry issued a statement saying that Astana supported the "way the Russian leadership proposed to resolve the issue". Kazakhstan's position in the crisis means a serious blow for the US strategy in Central Asia, which ultimately seeks to replace Russia and China as Kazakhstan's number one trade partner. Large US oil corporations started to enter Kazakhstan immediately after the collapse of the Soviet Union in 1991.

The US has tried to cultivate Nazarbayev, with the fervent hope that he could be persuaded to commit Kazakhstan's oil to the BTC. This was important to make the BTC pipeline viable, as the Azeri oil was not sufficient for this goal. However, analysts are now saying that the plans to use Georgia as a bridge for energy supplies to Europe will probably be abandoned due to this tiny country's armed conflict with Russia, which has exposed the insecurity of the route.

Kazakhstan will also prefer to export its oil through Russian pipelines crossing Russia's territory. The Nabucco project suffers the same problems. Apart from its enormous cost and the political problems to make it cross the Caspian Sea bed, the promoters have not contracted enough gas for it from Azerbaijan or Turkmenistan. In fact, Turkmenistan has also signed an agreement with Russia to sell this latter country a large part of its gas production.

Now, Georgia's vulnerability may have dealt a lethal blow to Nabucco, according to economic experts. "A trans-Caspian gas pipeline can be considered a forever buried chimera", The Moscow Times quoted Pavel Baev, an energy expert at the International Peace Research Institute in Oslo, as saying. "It became clear for all the participants of these energy games that nothing will go through the Caspian Sea." For the moment, given the BTC's problems and the attacks on the rail line, the only remaining option for BP and Azerbaijan to send their oil to the market lies through Russian or Iranian territory. Therefore, Russia has come closer to redirecting the flow of oil from the Caspian Sea back onto its own territory for the near future.
Even if Georgia can technically get the rail line up ready and running, they will need Russia's tacit approval to continue with business as usual. "The Russians have clearly demonstrated their military capability of getting very close to the pipelines", Edward Chow, an energy expert at Washington's Center for Strategic and International Studies, told Los Angeles Times. "And they also sent the Black Sea fleet off the Georgian coast, so they also have demonstrated that they can blockade Georgia anytime they want." The pipeline to the Russian port of Novorossiysk now offers the best route for exports. Moscow's success in gaining control over oil distribution in the Caucasus is one of the biggest achievements of its military operations in Georgia. Regardless of Russia's military withdrawal, Moscow will dictate the terms under which oil exports from Azerbaijan resume.

Therefore, Azerbaijan ended up exporting about 100,000 barrels of oil per day through the Baku-Novorossiysk pipeline. However, Baku does not want to depend on Russian infrastructure again for its energy exports and has opted for the Iranian option. Press TV has reported that on August 24, Azerbaijan delivered its first oil cargo for transit through Iran after exports were disrupted by the recent Georgian conflict. In this way, Iran has become the new route for oil exports from Azerbaijan.

According to news reports, Azeri oil is delivered from Sangachal Terminal in the south of Baku to the Iranian port of Neka in the Caspian Sea. Iranians use this oil for their domestic needs and an equivalent amount of crude oil is then exported through the Khark Island in the Persian Gulf to Azerbaijan's clients. Azerbaijan will export between 5,000 and 10,000 barrels of crude oil via Iran daily, according to an Iranian oil ministry official. The current level of the crude swap by Central Asian countries via Iran has increased from 50,000 to 100,000 barrels per day, and it is expected that this will soon surpass 200,000 barrels per day. Iran has signed oil swap deals with Kazakhstan, Turkmenistan, Russia and Azerbaijan.

Azerbaijan recognizes that Iran has strategic benefits which make the new deal advantageous. The most important being the location of Iran with its access to free waters via the Persian Gulf. For Iran, the agreement with Azerbaijan will also have political benefits as it will strengthen its position during negotiations with the West, especially with the United States.

Therefore, the BTC and Nabucco pipeline projects, both crucial components of the US's Caspian great game, are now in tatters. These US dreams have suffered a setback with both the Georgia crisis and the Kazakh leadership now closing ranks with Russia. Europe and the US have realized that "hardly anyone will invest money in new projects" associated with Georgia, said Konstantin Simonov, director of Russia's Fund for National Energy Security. It seems that Moscow has again outwitted Washington.

Source: Payvand's Iran News, September 03, 2008.