Is Baku-Ceyhan A Pipe Dream?

Tuesday, 8 May, 2001

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Rovshan Mamedov

The future of the Baku-Ceyhan pipeline hangs in the balance as gloomy economic forecasts begin to dampen the political fanfares.

The project - which enjoys the enthusiastic backing of the United States - could throw an economic lifeline to both Azerbaijan and Georgia.

But some industry experts say the $1.3 billion pipeline is doomed to failure because Caspian Sea oil reserves cannot justify its construction.

The idea of building a pipeline from the Azeri capital, via Tbilisi, to the Turkish port of Ceyhan was first mooted in 1991. The launch date was set for 2004.

However, despite a few preliminary surveys, the project still remains firmly on the drawing board.

But the lack of progress has failed to puncture political enthusiasm for the Baku-Ceyhan pipeline in the South Caucasus. Georgia sees the project as a means of escaping Russia's oil and gas hegemony in the region.

Shalva Pichkhadze, deputy head of Georgia's State Bureau for International Relations, said, "Georgia's independence depends largely on finding alternative sources of energy."

He added, "Even now, when the project is signed and sealed, Russia continues to view it with scepticism."

And Georgy Chanturia, president of the Georgian Oil Corporation, believes that Russia will eventually be forced to use the pipeline as it becomes increasingly difficult to export crude oil from the port at Novorossiisk.

However, the Russians remain non-committed. Victor Kalyuzhny, the Kremlin's special representative on the Caspian, described the project as "very far sighted", explaining that it would not be operating at full capacity until 2015.

Kalyuzhny added that the Kremlin did not object to its construction but "Russia already had all the facilities [for exporting oil from the Caspian] in place and we should make use of them".

The Americans continue to back the project, whilst stressing that "the pipeline is not aimed at challenging Russia's interests but at breaking the monopolies on oil exports from the Caspian region."

And, at the end of March, US president George Bush told delegates at an American-Turkish conference that the pipeline project was one of the most important factors in establishing good relations between the USA and Turkey.

Elizabeth Jones, senior advisor to the US State Department, expressed the hope that the project would go according to plan and would be completed in time to cater for increased production from the Caspian oil wells.

However, she stressed that the final decision on building the pipeline would be taken by private companies, based on economic and financial considerations.

Meanwhile, the Azeri government remains determinedly optimistic. In a recent meeting with Richard Shelby, head of the Senate's intelligence committee, President Heidar Aliev said, "The Baku-Ceyhan pipeline is already a reality." Aliev's son, Ilkham, is first vice-president of GNKAR, the Azeri state oil company.

GNKAR experts are confident there is sufficient oil in the Caspian to fill not just the Baku-Ceyhan pipeline but also the Baku-Supsa facility and, given the right conditions, the Novorossiisk route as well.

In Azerbaijan, there is a marked sense of urgency. David Woodward, president of the Azeri International Operating Company (AMOK), believes the decision to start work on the pipeline should be taken no later than the spring of 2003 in order to meet the 2004 deadline.

Woodward said the main advantage of the Baku-Ceyhan route was that it obviated the need to transport oil across the Bosphorus. In this context, even the Kazak government could see it as a realistic alternative to the Tengiz-Novorossiisk route.

Talks were continuing with other interested parties - such as US Exxon Mobil and Russia's Lukoil - to assess whether or not they would be prepared to use the facility.

Woodward added, "I am sure that Lukoil will review this project from the commercial angle and, when the pipeline is ready and a viable proposition, I think the company will make use of it."

The AMOK president estimated the construction costs at around $1.3 billion but valued the pipeline at $2.7 billion. He added, "These are preliminary figures at this stage, and they will be assessed after the surveys have been completed."

Woodward said a detailed survey would be launched at the end of June and would last for around 12 months. The survey would assess the projected course of the pipeline and test geological conditions in the affected regions.

He added that the survey team had already defined a preferred route which had been presented to the Azeri, Turkish and Georgian governments for approval.

Half of the costs for this stage of the project will be covered by GNKAR with another 25 per cent invested by the operator, BP. Other participants include Unocal, Statoil, Itochu, Delta Hess and Devon Energy.

However, Western experts continue to pour cold water on the Baku-Ceyhan project.

Ted Carpenter, vice president of the Cato Institute, said, "Washington and Ankara are pushing forward this expensive and impractical project for strategic rather than economic reasons," he said.

And Wayne Merry, director of the Programme on European Societies in Transition, agreed that the pipeline project made little economic sense.

"The project was initiated for political reasons by Washington, Ankara, Baku and Tbilisi. But no one government is able to - or wants to - foot the bill. A pipeline should make business sense, not political sense. I believe that either the pipeline will never be built or it is simply doomed to failure."

Rovshan Mamedov and Revaz Shengelia are both independent journalists based in Azerbaijan and Georgia respectively