High-stakes lure of bringing Caspian oil to consumers

Georgian officials see the future security of their small Caucasian nation to be part of the modern Silk Road pipeline that brings Caspian Sea oil riches to the West.

Today, major Western oil companies are taking a second look at what was for years dismissed as an unfeasible, "political" pipeline backed by the United States - meant to bypass Russia and Iran.

Their prospects revolve around a 1,080-mile pipeline that would bring Caspian oil from Azerbaijan's capital of Baku across Georgia to Turkey's Mediterranean port of Ceyhan. For Georgia, the package would yield an estimated 70,000 jobs, some $80 million a year in transit fees, and enhanced stability in an unstable region.

But the price tag is high and industry analysts warn that a slew of questions - from security concerns and cost overruns to finding enough oil to fill the pipeline - may keep the project on the drawing board. Still, it received a boost yesterday when major oil producer Kazakhstan signed a new protocol paving the way for possible use of the route, a critical ingredient for success, analysts say.

The Bush administration supports the pipeline - a cornerstone of former President Clinton's Caspian policy - and is considering ways to help finance it, says Elizabeth Jones, the president's special adviser on Caspian energy. But Spencer Abraham, the new energy secretary, last year called "the lure of cheap oil from the Caspian an illusion."

The five states that border the Caspian have not yet agreed how to share the sea's oil and natural-gas riches. Iran forced a delay in a key summit due to take place next week. President Mohamad Khatami is reported to have requested urgent oil talks first with Russian President Vladimir Putin.

Still, hopes have soared in the Georgian capital, Tbilisi, since eight oil companies led by British Petroleum-Amoco decided in October to begin a six-month, $26 million preliminary engineering study. A detailed year-long, $100 million study is expected to follow. Hopes rose further in mid-February, when US oil giant Chevron announced an interest in taking part in the second study. Chevron is already a major Caspian player, as half-owner of the company that operates Kazakhstan's Tengiz oil field and a 15 percent shareholder in a competing Kazakhstan-Russia pipeline due to open this month. Earlier this week, a BP-Amoco spokesman told Reuters: "We are supporting it, and we think it will be built."

"It's now becoming a more economic pipeline, not a political one," says Giorgi Chanturia, head of the Georgian International Oil Corporation. "Georgia considers this project the backbone of regional cooperation, the future for us, and a real guarantee of independence [from Russia]."

He recalls bringing oil executives to Georgia in 1994, when the country was torn by civil war. Lights at the airport were out; gunfire rattled in the background. "Then [the pipeline] was a fantasy," Mr. Chanturia says. "Now we have new realities." Among them is the discovery of the huge Kashagan offshore oilfield in Kazakhstan, which geologists reportedly consider to be one of the largest finds since Alaska's North Slope in the 1970s. Claims by local governments add up to one-third of global petroleum reserves, but more realistic estimates range from 4 to 8 percent each for oil and natural gas.

The Kazakh find is no panacea for the US-backed pipeline, however. It is on the northeast end of the Caspian Sea, far from the southwest start-point of the Baku-Ceyhan line. Oil would have to be barged across or carried by a new underwater pipeline. Kazakhstan is reported to be gradually warming to the idea. Ms. Jones has called Kazakhstan - where she once served as US ambassador - the "eastern anchor" of Baku-Ceyhan.

Another boost: Current oil prices are pushing $30 per barrel, after the late 1990s slump to less than $10 per barrel froze most projects.

But the "new realities" still may not convince oil companies to shell out the estimated $2.2 billion to $4 billion for the pipeline. Turkey has vowed to pay for cost overruns on its section, but the US - despite heavy political support - has only hinted at contributing money.

Cheaper routes could open up through Iran, especially if the US eases sanctions. Questions also remain about oil-quality differences from area to area. The main problem may be how to fill the pipeline's 1 million barrel-per-day (b.p.d.) capacity, since Azerbaijan production is expected to peak at 800,000 b.p.d. That would leave a 200,000 b.p.d. gap to be filled by Kazakhstan.

"It's still a political pipeline, because until you have the additional volumes of oil to make this project commercial - and real money on the table - it's hard to say it is economic," says Julia Nanay, director of the Petroleum Finance Company in Washington. The decision to conduct feasibility studies "does create positive news," she says, but still "there are too many undecided issues."

That hasn't stopped Georgian and American officials from pushing for the flow of black gold in this direction.

Oil companies will signal their plans in May or June, US officials say, if they take on the year-long Baku-Ceyhan study. "The minute you spend $100 million on detailed engineering, you're basically in it," Ms. Jones said in late January at the Nixon Center in Washington.

Georgian President Eduard Shevardnadze has promised that his country can keep the line secure, and that the local conflict - which resulted in breakaway regions of Abkhazia, South Ossetia, and Adjaria - is over.

"For us, it is the beginning of a new economic life," says Alexander Rondeli, chief of the Foreign Policy Research and Analysis Center of the Georgian foreign ministry. "An important pipeline on your territory means security, stability.... It creates trust," Mr. Rondeli says.

Still, shorter existing pipelines can undermine the line. Oil companies, too, base calculations on the much stricter standard of $15 to $17, says Thomas Stauffer, an energy analyst in Washington. "The numbers still don't add up," he says.

Regional insecurity is also an issue. "Would you want your pension fund invested in a pipeline that goes close by Dagestan, [Russia], that passes within raiding distance of Chechnya, South Ossetia, and Abkhazia, then actually goes through Adjaria before it gets into Kurdish territory?" Mr. Stauffer asks.

Analysts say the Clinton policy of sidelining Iran and Russia may also need retooling - even if Baku-Ceyhan goes ahead.

"This pipeline is clearly something that could happen, and in the end there may be room for lots of different pipelines," says Ms. Nanay. "But ultimately you can't exclude Russia and Iran. It's their neighborhood.... They are going to be very important players, no matter what."

(c) Copyright 2001. The Christian Science Publishing Society