US energy interests and the Caspian: The free ride is over

by Peter Kiernan

While control over routes for the export of oil and gas to Western markets was clearly not the primary cause of the recent hostilities between Moscow and Tbilisi, the vital role of the Caucasus as an energy transit route nevertheless cannot be ignored in the context of Russia's increasingly tense relationship with the United States and its European allies.
The collapse of the Soviet Union in the 1990s led to the formation of several breakaway republics in the Caspian region, an energy-rich area which had been off limits to Western investment. That these newly formed states with substantial reserves of hydrocarbons -- Azerbaijan and Kazakhstan in particular -- should open their doors to international energy companies was a high priority of the Clinton administration.

The United States also saw that drawing these new states into the Western orbit would have two major strategic benefits: the diversification of energy supplies away from the Middle East and the limiting of Russian influence in an emerging energy-rich region -- a convenient post-Cold War dividend indeed.
Such was the excitement in Washington about the Caspian's potential that the State Department in 1997 reported that the region contained around 200 bn barrels of crude oil. The region was subsequently labelled as a "new Kuwait" -- one that would be free from Russian influence, provide an alternative to Saudi Arabian oil and reduce Iran's role in the global oil market.
"I can't think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian," then-Halliburton CEO Dick Cheney said in 1998.

While the Caspian region does hold substantial reserves of crude oil, expectations that it could rival the Middle East proved to be unfounded, according to subsequent estimates. The natural gas bounty also proved to have been overestimated: Central Asian states host considerable supplies but their combined reserves amount to vastly less than those in nearby Russia and Iran.
Still, the intense American interest in the Caspian energy was viewed with consternation by a weakened Russia. Russia feared losing strategic influence in its own backyard at a time when its economy was taking a nosedive.

Unfazed by Russian objections, the United States pursued energy diplomacy in the landlocked Caspian region, and began seeking pipeline routes that would link that region's energy to Western markets, while bypassing Russia. The imperative of US policy was to ensure that Russia would not be the sole conduit for the export of Caspian oil and gas.
US oil major Chevron, an early player in Kazakhstan, was involved in talks with Russia and other partners as part of the Caspian Pipeline Consortium to build a pipeline that would transport Kazakh oil to the Russian Black Sea port of Novorossiysk. That pipeline opened in 2001, but Washington policy makers also sought a non-Russian route for transporting oil from another budding petro-state in the region, Azerbaijan, via its neighbours.

The United States pushed for the construction of a major oil pipeline stretching from near the Azeri capital of Baku, on the Caspian Sea, through Georgian territory to the Turkish Mediterranean port of Ceyhan.
"This is about America's energy security, which depends on diversifying our sources of oil and gas worldwide," then-Energy Secretary Bill Richardson told in 1998, referring to US involvement in the Caspian and projects like the Baku-Tbilisi-Ceyhan (BTC) pipeline. "It's also about preventing strategic inroads by those who don't share our values." The latter comment was a clear reference to Russia, though Georgia and Azerbaijan were still incomplete democracies.

Caucasus pipeline routes were the flavour of the decade in the 1990s, given the optimistic expectations of oil production growth in both Azerbaijan and Kazakhstan and those countries' desires to connect their oilfields to the West. An existing pipeline running from Baku to the Georgian Black Sea port of Supsa was upgraded following an agreement between the Azeri and Georgian governments, and this became operational in 1999.
But today the bulk of Azerbaijan's oil exports are transited through the BTC pipeline, which became operational in 2006 and has a capacity of 1 mm bpd. While significant, BTC's capacity represents just over 1 % of total daily global oil supply. The South Caucasus Pipeline, a natural gas pipeline running parallel to the BTC and terminating in the eastern Turkish city of Erzurum, became operational in late 2006.

The construction of the BTC pipeline was a strategic victory for the Clinton administration, which was able to overcome initial oil company scepticism and Russian opposition. By actively helping to secure the supply of energy from the Caspian region via its preferred routes, the US became a player in this previously forgotten part of the world.
"All strategic contracts in Georgia, especially the contract for the Caspian pipeline, are a matter of survival for the Georgian state," Mikhail Saakashvili, whosoon became Georgia's president, said in 2003, at the height of that country's Rose Revolution. But the American courtship of Georgia -- and its earlier courtship of Azerbaijan -- was a development that did not go unnoticed in Russia.

For Russia, the expansion of US-led, Western geopolitical influence in an arc from the Baltic States south into Eastern Europe and then east through the Caucasus and Central Asia represented its own strategic encirclement.
Georgia's pro-Western alignment exacerbated Tbilisi's existing tensions with Moscow, partly due to Russian support for the two breakaway regions that claim independence from Georgia, South Ossetia and Abkhazia. For Russia, support for South Ossetian and Abkhazian separatism has been a way of distracting Georgia as it strengthens ties with the United States, particularly since Saakashvili's ascent to power in 2003-04.

The brief August war between Georgia and Russia did not represent an attempt by Moscow to occupy Georgia and thus assume control of crucial pipeline routes, none of which suffered any damage. Nevertheless the conflict highlighted the potential vulnerability of an energy transit corridor in a region that has become a theatre for American-Russian strategic competition.
As Georgia continues to push for NATO membership, Russia is likely to try to keep the Tbilisi government distracted by problems in its separatist areas.

The United States was able to make substantial inroads into the Caucasus and nearby Caspian region over the last two decades. But times have changed. Russia is economically more powerful -- due mainly to its status as a major oil and gas exporter -- and the chaos that it endured in the 1990s has been replaced by the successful consolidation of state control over strategic sectors of the Russian economy, including energy.
Russia is in a better position to leverage its role among neighbours that inhabit its traditional sphere of influence. The recent conflict in Georgia demonstrates that the virtual free ride the United States has had in the region is over.

Peter Kiernan is an associate at AALC, limited company, an international business consulting firm in the Washington, DC, area.