Institute for War and Peace Reporting | Giving Voice, Driving Change

Baku Pipeline Threatened

Investors are getting cold feet over plans to build a pipeline which would break the Russian and Iranian stranglehold on Caspian oil wells.
By Rasim Musabekov

Funding problems and political wrangling continue to dog the planned oil pipeline from Baku to Turkey amid growing doubts over its commercial viability.

The $2.4 billion project focuses on a 1,080-mile oil pipeline from the Azeri-Chirag wells passing through Georgia to Turkey's Mediterranean port of Ceyhan. It was given the go-ahead in November 1999 at the Istanbul Summit of the Organisation for Security and Cooperation in Europe, with an agreement signed jointly by Turkey, Azerbaijan and Georgia and witnessed by the United States, Kazakhstan and Turkmenistan.

US President Bill Clinton said the deal - aimed at exporting Caspian Sea oil to world markets without having to rely on Russian or Iranian pipelines - will help ensure that no one country can choke off the global energy supply. Construction is due to begin in 2001 with completion in 2004.

However private investors have been unimpressed by the political fanfares and remain unconvinced by financial forecasts.

The most damning estimates so far have come from David Woodworth, president of the Azerbaijan International Operation Company (AIOC), who claimed that the Azeri-Chirag oil fields were too limited to justify the cost of construction. He predicted that the deposits would yield only 4 billion barrels of crude oil whilst the project requires between 6-8 billion to make it profitable.

Woodworth went on to say that the project was further complicated by its vast scale and the difficult terrain through which the pipeline would run. AIOC later announced that it would no longer be taking part in the project, although Woodworth added that "any company forming part of AIOC is free to independently finance the project if it so desires."

The move took most parties by surprise as 51 per cent of AIOC shareholders represent governments with political commitments to the pipeline construction. Now the Azeri government, which hopes to hold a majority stake in the pipeline, will be obliged to negotiate with each member of the consortium in a bid to raise the necessary funds.

The investment climate has been further clouded by political manoeuvring in the region. Although the pipeline will give Central Asian republics a chance to bypass the Russian supply network, the Kazakh government has refused to agree to quotas proposed by the Baku-Ceyhan consortium. Kazakhstan currently transports a third of its oil - nearly 10 million tonnes - to Russia through the Atirai-Samara pipelines.

Georgia has also dropped several flies in the ointment. The republic has refused to take financial responsibility for any damage to the pipeline through natural or industrial accidents. It is also reserving the right to raise transit tariffs as soon as the capital costs of the project are paid off.

The Georgian approach is understandable. Transit tariffs of $0.17 per barrel were set in early 1999 when world oil prices were low. Now that prices have more than doubled, the Georgian government has asked to be paid in oil rather than cash (3 per cent of the entire amount carried by the pipeline).

The Georgian demands will play havoc with financial forecasts, causing widespread concern amongst potential investors and reinforcing speculation that the project may never get off the drawing board.

Meanwhile, regional leaders have been making desperate efforts to break the deadlock. Azerbaijan's president, Heydar Aliev, flew to Turkey in January, pre-empting a visit by Turkey's Suleiman Demirel to Tbilisi.

Georgian President Eduard Shevardnadze assured the Turkish head of state that Georgia would make every effort to ensure the project went ahead as planned. But top officials in Tbilisi have since reiterated their earlier reservations.

Despite the political shenanigans, the crucial factor remains the true extent of the Caspian Sea oil reserves, which are still being assessed by the 19 contract-holders in the region. If large new deposits were to be discovered, neither the Russian nor the Iranian pipelines would serve as viable alternatives.

Rasim Musabekov is a political scientist in Baku.