Debate continues over viability of Baku-Tbilisi-Ceyhan construction

Jun 17, 2002 02:00 AM

by Mark Berniker

Several global oil conglomerates are placing large bets that the Baku-Tbilisi-Ceyhan (BTC) pipeline will emerge as the prime conduit for the flow of Caspian Basin energy resources to Western markets. The impending start of construction, however, has not settled a debate over whether the pipeline is commercially viable.
Detractors question whether the Caspian Basin contains sufficient energy reserves to justify the enormous construction and projected transport costs. Proponents insist that both economic and political factors must be considered when evaluating the project.

Both the Clinton and Bush administrations have been among the project’s staunchest supporters. The political allure of the BTC project for the United States is self-evident: the BTC pipeline could deny Iran a significant role as a Caspian energy exporter; reduce the dependence of Caucasus and Central Asian states on Russian pipelines; and bolster fledgling regional economies, especially those of Azerbaijan, Georgia and Turkey.
"We have never said it’s just about business. It’s about these producing countries gaining a greater measure of autonomy. But the consortium wouldn’t be rolling the dice on billions of dollars of investment, without having firm commitments for the oil," says Stephen Mann, senior US adviser on Caspian Basin Energy Diplomacy.

BTC opponents suggest that political factors are possibly blinding the US government to the financial risks. "The BTC has been politically motivated, more than any other oil project in the world," said a US government source, adding the BTC pipeline project "may be sanctioned and built, but there are serious questions whether there is enough oil volume, and whether heavy tariffs will make it economically feasible."
The BTC project is estimated to cost about $ 2.9 bn for a 1,090-mile pipeline network. The lead stakeholder is British Petroleum (BP) with a 38 % stake. Azerbaijan’s state oil company, SOCAR, has a 25 % share. Other members of the consortium include Italy’s ENI, Norway’s Statoil, Turkish Petroleum, Japan’s Itochu, the US-Saudi venture Delta Hess and US-based Unocal.
The target completion date for construction is 2004, with the first oil flowing in 2005. Once complete, the pipeline will have the capacity to ship 1 mm bpd of oil. Overall, the BP-led consortium’s commitment to developing Caspian Basin energy reserves is substantial.

On May 29, BP executive Richard Oliver was quoted as saying that over $ 13 bn will be invested in Azerbaijan on several projects, including BTC construction. If all the projects are realized, BP expects that 7 % of the oil extracted by BP globally will come from Azerbaijan.
Several industry analysts do not share BP’s apparent optimism, cautioning that building the BTC pipeline may not be sufficient to unlock the Caspian Basin’s energy potential. "The Caspian region is incredibly complex: politically, economically and logistically. There is a lot of natural resource potential, although somewhat unknown, but it doesn’t look like it’s going to be another Persian Gulf," says Lowell Feld, international oil market analyst for the Energy Information Administration, the independent statistical and analytical arm of the US Department of Energy.

The partners in the BTC consortium are expected to gain access to a tremendous amount of public and private financing for the pipeline. The equity investors in the venture, including the members of the consortium, will provide only up to 30 % of the capital, with the remainder coming from government-affiliated lenders and private banks.
For example, the Caspian News Agency reported June 4 that the European Bank for Reconstruction and Development (EBRD) would make $ 300 mm available in 2002. The World Bank’s International Finance Corp. (IFC) is expected to make a similar $ 300 commitment.

Another potential lender, the US Export-Import Bank, is currently reviewing a variety of reports, and is expected to decide by fall whether to provide financing for the pipeline project. "There’s no reason to believe it’s not going to happen, specific timing is anyone’s guess, we’re trying to review all the relevant documents," says Barbara O’Boyle, vice president of project and structured finance for the US Export-Import Bank.
O’Boyle added there are "a lot of moving parts," referring to the BP-consortium’s members, multiple advisers, and officials from regional governments. She said the BTC pipeline project is also inextricably linked to "upstream projects," both in Azerbaijan and elsewhere in Central Asia, that are expected to provide the oil and gas for the pipeline. "The pipeline without the upstream isn’t worth much." O’Boyle’s reference to "the upstream" points to Azerbaijani oil from both existing reserves and new development projects.

Just how much oil and gas there is in the Caspian Basin remains a subject of debate. Some major oil companies – including ExxonMobil – seem to be growing more cautious about the region. ExxonMobil, for one, announced in early June that it planned to close one of its offshore Caspian projects – in the Oguz oil field – because exploratory drilling had not found sufficient reserves.
ExxonMobil is one of three companies that have been asked to join the BTC consortium, but who have so far declined to do so. Russia’s LUKoil and ChevronTexaco have also balked at taking on small stakes in the BTC project.
Stephen Mann, the US diplomat, insisted that the BTC could be profitable by relying exclusively on resources developed in Azerbaijan. "There’s enough oil in Azerbaijan to make a go of this. BP and its partners in the consortium have calculated the economics and feel confident they can make the BTC pipeline viable," says Mann.

But an industry source said there are limits on the amount of oil that can be extracted from fields in Azerbaijan, and that the BTC pipeline will have to rely on oil exports from Kazakhstan to be viable over the long-term. Kazakhstani officials have so far kept their energy export options open.
Astanais already exporting oil via the Caspian Pipeline Consortium (CPC) via Russia. On May 13, Russia and Kazakhstan struck an agreement over the demarcation of the northern Caspian seabed, seeming to clear the way for further joint development projects. Whether Kazakhstan will be willing to commit large volumes to the BTC pipeline remains an unanswered question.

Mark Berniker is a freelance journalist specializing in Russian, Eastern European and Central Asian affairs.

Source: EurasiaNet Business & Economics
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