Azerbaijan En Route to Oil Riches

Thursday, 26 May, 2005

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Gulnaz Gulieva

With the first oil flowing into the Baku-Tbilisi-Ceyhan pipeline, Azerbaijan made a giant step towards its ambition of becoming a leading oil nation.

But as phenomenal wealth becomes a real prospect, there are concerns about how the country will cope with the responsibilities the major international pipeline will bring.

The taps were turned on at a grand ceremony on May 25 at the Sangachal terminal on the Caspian Sea attended by the presidents of the four major countries involved, as well as US energy secretary Samuel Bodman.

The first tankers will be filled at the Turkish Mediterranean port of Ceyhan, at the other end of the 1770 kilometre pipeline, only at the end of the year. BTC, as it is known, after the three main points that it passes through in Azerbaijan, Georgia and Turkey, will eventually pump one million barrels of oil a day and provide around one per cent of world output.

“The launch of the pipeline in 2005 will help the development of the economy and the strengthening of security in the whole region, where there are unresolved local conflicts,” Azerbaijan president Ilham Aliev said at the ceremony. “With the exploitation of this pipeline the economy of Azerbaijan will make a serious leap forward.”

The Baku government’s big day was marred, however, by continuing controversy over the detention of several dozen protesters from pro-democracy youth organisations who staged a rally on May 21. The interior ministry said that 45 people had been arrested, while opposition activists put the figure at between 200 and 300.

The flow of oil into the BTC marks the end of an extraordinary decade of highs and lows when its viability was frequently questioned. Russian specialists in particular were highly sceptical, characterising the pipeline as a politically motivated project launched by the United States. In the late 1990s, when oil prices were low, many oil experts also questioned its economic feasibility.

However, the steady rise of oil prices since 2001, as well as increased instability in the Middle East, made BTC attractive once again. In the words of Sabit Bagirov, head of the Centre for Economic and Political Studies in Baku, no one doubts the economic case for the pipeline, “The fact that a project worth four billion dollars is two thirds financed by foreign institutions is proof of its viability.”

The first contract to develop the Azeri-Chirag-Guneshli oilfields in the Caspian Sea was signed in 1994 and nicknamed “the Contract of the Century”. Other projects have proved commercially non-viable, but the aforementioned sites have delivered even more than was expected of them, said Pasha Kesmanski, oil and gas expert from Trend news agency.

An official from Azerbaijan’s state oil company, SOCAR, who asked to remain anonymous, said that many foreign oil investors had abandoned projects and pulled out of Azerbaijan when oil prices were low. “But now the oil price is much higher and so we are now thinking of developing those projects ourselves without foreign partners, using the revenue we get from our current energy projects,” he said.

The presence of Kazak president Nursultan Nazarbayev at the opening ceremony signalled another potential dimension for the pipeline, as an outlet for oil from Kazakstan.

“Judging by the estimates of the companies involved in the project, BTC is viable even with the resources of the three Azerbaijani fields Azeri, Chirag and Guneshli and with the addition of Kazakstan its economic attractiveness will grow significantly,” said Bagirov.

Nazarbayev himself told the ceremony, “We are the main oil producers in the region and over the coming decade we can become major players in the expert of energy resources.”

Kazakstan itself uses no more than 30 million tonnes of oil a year but plans to extract 100 millions by 2010 and 150 million by 2015.

Azerbaijan will produce 20-25 million tonnes of oil in 2005, rising to 50-60 million tonnes in 2007 of which 44 million is due to be exported, mainly via BTC.

“With the start of the Baku-Ceyhan pipeline a Mediterranean market will appear for our oil alongside the existing Black Sea market,” said President Aliev. “We will also provide all the necessary infrastructure for the transit of oil from Kazakstan. The doors are open for everyone to join this project, including the Russian Federation.”

Aliev also said that the Baku-Novorossiisk pipeline ending on the Russian coast of the Black Sea was now no longer commercially attractive in comparison to BTC.

Russian energy envoy Igor Yusupov was due to represent Moscow at the ceremony but did not attend, saying he was ill.

With the oil price now consistently over 40 dollars a barrel, new projections are being made as to what revenues Azerbaijan will earn from BTC and what this will mean for a country with mass poverty.

According to Inglab Akhmedov, director of the Public Finance Monitoring Centre in Baku, estimated that over the next 25 years Azerbaijan could be set to earn as much as 160 billion dollars from all its oil and gas projects.

“That is a colossal amount of money when you set it against an annual budget of two billion dollars,” Akhmedov said. “And that creates risks for the economy as a whole. In its short history independent Azerbaijan has not only not acquired experience in managing large amounts of money, but it’s also not created an infrastructure for the effective and transparent management of oil revenues when society has weak control over them.”

An Oil Fund has been set up to ensure wise spending of oil revenues, but there’s concern about how effective it will be. “While the Oil Fund is the most transparent organization in the country, there is still a lack of clarity in the way it is used,” said Bagirov.

And others express an additional worry that Azerbaijan will suffer from what is known as “Dutch Disease” when a country is over-reliant on natural resources and the rest of the economy suffers.

Gulnaz Gulieva is a freelance journalist in Baku. Rufat Abasov is a reporter with Reuters in Baku.