Turkey and Caucasus: Pipeline politics play their course

by Dr Hooman Peimani

The proposed Baku-Tbilisi-Ceyhan oil pipeline, a controversial project for the export of Caspian Sea oil, has remained on paper for about a decade. Many factors, including its length, direction, cost and non-secure nature have prevented its construction despite the conclusion of many agreements among its immediate beneficiaries: Azerbaijan, Georgia and Turkey.
But over the past few weeks, a statement of renewed interest in its construction by an Azerbaijan-based consortium of oil companies has revived hope among its proponents. Because of its various deficiencies, its construction in the foreseeable future seems as unlikely as ever. However, the politics behind the pipeline have prevented the selection of viable export routes. In turn, this situation has for all practical purposes delayed the development of the Caspian Sea's oil industry, leaving it without reliable long-term export routes.

The Caspian region's oil and gas resources have tempted many oil companies, ever since the Soviet Union's fall made their development possible. But far lower than the initial estimates (200 bn to 300 bn barrels), its proven reserve are less than 10 bn barrels according to an April statement by ENI, an Italian oil company operating in the region.
While it cannot rival the Persian Gulf, which contains 60 % of the proven global oil reserves, its reserves are still significant enough to motivate the Caspian littoral countries (Iran, Russia, Azerbaijan, Kazakhstan and Turkmenistan) and international oil companies to embark on development projects. Having large oil reserves elsewhere in their countries, these projects are not vital for Iran and Russia.
However, the other three Caspian countries have seriously sought to develop and export their share of the Caspian's oil and gas resources; they are practically the only major source of income for addressing their enormous economic problems. Nevertheless, their oil and gas resources have remained mostly underdeveloped in the absence of reliable long-term export routes.

As neighbouring countries with extensive oil export infrastructure and access to open seas, Iran and Russia offer "natural" export routes to their Caspian neighbours. Yet only a fraction of the existing oil exports are conducted via their routes, thanks to the US government's opposition to their use as the long-term export routes.
As a result of its troubled relations with the United States, Iran's share is much smaller than that of Russia, although it offers the shortest, the cheapest and the most secure route. For political and strategic considerations, the US, whose companies dominate the Caspian oil industry, has sought to bypass Iran and Russia for Caspian oil exports. Being partly used by Kazakhstan, the existing route via Georgia connecting Azerbaijan to the Black Sea port of Supsa is only a short-term solution.

With full US support, Turkey has sought to establish itself as the main Caspian export route. Beside economic gains, that status would increase Turkey's political influence in the Caucasus, a neighbouring region of great importance for the Turks. Their proposed Baku-Tbilisi-Ceyhan pipeline -- connecting Azerbaijan to Turkey's Mediterranean port of Ceyhan via Georgia -- would connect the three landlocked Caspian oil exporters to international markets, while bypassing two regional powers (Iran and Russia) with strong interests in the Caspian region.
Being mainly a political project, the envisaged pipeline is meant to ensure the latter's minimum involvement in the Caspian energy industry. Because of its lack of economic sense, most major oil developers (American and non-American alike), especially those operating in Kazakhstan and Turkmenistan, have not shown any interest in the project.

The Turkish route suffers from major deficiencies. It is long (about 1,700 km) and costly -- estimated at $ 2.4 bn to $ 4 bn. It also lacks security, as it would pass through highly unstable Azerbaijan and Georgia. Apart from the threat of their armed independence movements, there are doubts about the long-term stability of their fragile political systems. The Turkish part of the route would pass through its rebellious Kurdish region, which could easily burst into another round of civil war.
Moreover, the Turkish route's westward direction would make it suitable to supply the European market whose fuel imports will only grow by a mm bpd in the next decade whereas that of the Asian market will increase by 10 mm bpd. There is not even certainty about the availability of the European market since the existing, unused OPEC and Russian export capacities could meet most, if not all, of the increased European demand.

The shortcomings of the Baku-Tbilisi-Ceyhan pipeline have dissuaded the Caspian oil developers from committing themselves to its construction. Its main proponents have been Azerbaijan, Georgia and Turkey, which have obvious interests in its construction. The US has also promoted it, mainly for political considerations.
For about a decade, its government has tried unsuccessfully to persuade US and other oil companies to opt for the pipeline. The major oil developers in Kazakhstan, whose commitment to use the pipeline is a necessity for its economic viability, have refused to do so. Instead, they have reduced their reliance on the Georgian route via Azerbaijan, while exploring the possibility of export through a pipeline via Iran. Currently, they export most of their oil via a Russian pipeline connecting Kazakhstan to the Black Sea port of Novorossiisk. <<P>Being barred from using the Iranian and Russian routes, in March the AIOC (a consortium of international oil companies operating in Azerbaijan) announced its interest in the pipeline project, in principal. It did not state any specific date for its construction, although it mentioned that it could begin as early as next year.
Currently, a major hindrance is the absence of financing for the project as many would-be financiers are simply reluctant to invest in a pipeline which is neither safe nor economically sensible. The possibility of a thaw in Iranian-American relations in the near future and the subsequent availability of the Iranian route have further discouraged major oil companies from financing the project. So far, all the expressions of interest in the project have remained on paper.

The Caspian's energy developers must solve the export route problem as the main prerequisite for ensuring large exports from their region. The existing uncertain export arrangement is simply an obstacle to the development of the Caspian's oil and gas resources. However, the proposed Baku-Tbilisi-Ceyhan route is not a reliable and financially viable solution to the problem.
The efforts to make it the main export route has only prevented those involved in the Caspian energy industry, regional countries and foreign companies alike, from its full development. This is an outcome of the prevailing uncertainty about the feasibility of large exports in the future beyond the capacity of the currently available export routes.
So long as this situation persists, the Caspian oil and gas industry will remain underdeveloped.

Dr Hooman Peimani works as an independent consultant with international organizations in Geneva and does research in international relations.