08 August 2006'

'The B.T.C. Pipeline and the Increasing Importance of Energy Supply Routes''

n July 13, world leaders and energy industry officials gathered in Turkey to inaugurate the Baku-Tbilisi-Ceyhan (B.T.C.) pipeline, the east-west hub intended to connect energy supplies in the Caspian region and Central Asia to Western markets. The first shipment of Azerbaijani crude oil, originally pumped on May 10, 2006, arrived in Italy to coincide with the inauguration. This occasion came just days before the annual G8 summit in St. Petersburg, Russia, where Moscow and Washington clashed over such issues as Russian membership in the World Trade Organization and the exploration of gas and oil reserves in the North Atlantic and Baltic Sea.The B.T.C. pipeline connects the Azeri-Chirag-Gunashli oil fields to Turkey's Mediterranean port city Ceyhan through Baku, Azerbaijan, and Tbilisi, Georgia. As the world's second-longest pipeline at 1,760 kilometers (1,094 miles), the majority of which is far underground, and with a path that traverses a politically unstable region, the B.T.C. pipeline has been criticized for being prone to sabotage or malfunction. Western leaders, however, hail it as one of the most important projects of the 21st century.The World Bank's International Finance Corporation and the European Bank for Reconstruction and Development funded the US$4 billion project. Energy company BP is the main operator and controls a 30.1 percent stake in the pipeline. Other major contributors include State Oil Company of Azerbaijan (S.O.C.A.R.), American firms Unocal Corp. and Chevron, Norway's Statoil, Turkish state oil firm T.P.A.O., and Italy's Eni SpA.B.T.C. Provides an Alternative to Russian EnergyFrom its inception, the B.T.C. pipeline was designed to challenge Russian hegemony over energy in the Caspian Sea region. Planning for a pipeline that could carry oil from the landlocked Caspian to the Mediterranean Sea -- while avoiding Russia and politically unstable areas such as Armenia -- began in earnest in 1999 and construction commenced in September 2002. The Western governments and firms behind the pipeline intended for it to rival the Russian-backed Blue Stream pipeline, which sends Russian gas to Turkey and Italy. [See: "Economic Brief: The Blue Stream Gas Pipeline"]Since much of Europe's energy -- 50 percent of the E.U.'s imported natural gas and about 25 percent of its imported oil -- is imported from Russia primarily through the state-owned energy giant Gazprom, Moscow has been firmly opposed to the B.T.C. since planning for it began more than ten years ago. In light of this year's Russia-Ukraine gas dispute that temporarily cut natural gas supplies to Europe, and Moscow's heavy-handed use of political leverage against its smaller neighbors, the European Union has made diversity of energy resources and providers a top priority. The B.T.C. pipeline will account for only a small percentage of global oil, but the West considers a stable -- and not Moscow-controlled -- supply to be worth the financial and political costs.In addition to the B.T.C. pipeline, several other projects intended to subvert Russian influence are in development. The Nabucco pipeline, a major part of the European Union's diversification strategy, will carry natural gas from Azerbaijan, Turkmenistan and Iran to Austria and Western Europe. Construction is slated to begin in 2008 and conclude in 2011; Nabucco is expected to achieve a maximum transport of 30 billion cubic meters of gas per year. Additionally, a number of extensions to the B.T.C. pipeline have been discussed and would connect oil and gas from Central Asia to Western Europe. Furthermore, oil from Kazakhstan travels through two pipelines controlled by Moscow, but Western involvement in the Central Asian country, particularly by the United States, and increased Chinese investment have intensified the "Great Game" being played in the oil-rich region by the world's major energy consumers.Kazakhstan signed on to transport nearly 200 million barrels of oil per year through the B.T.C. pipeline and has begun to explore oil shipments to China. With at least nine billion barrels in proven reserves and a shared border with both Russia and China, it could prove to be the most widely contested portion of the geopolitically crucial region.Turkey Positions Itself as a Global Energy HubDuring the inauguration ceremony, Turkish Prime Minister Recep Tayyip Erdogan alluded to his country's historical role as the bridge between Europe and Asia when he referred to the B.T.C. as "the Silk Road of the 21st century" that would increase stability and cooperation in the region. Once the B.T.C. pipeline reaches its expected output of one million barrels per day, which is scheduled to occur in 2009, roughly eight percent of the world's oil will flow through Turkey. While this amount comprises only a fraction of the oil produced by O.P.E.C., Turkey is banking on the idea that a secure energy provider will allure the United States and Europe and translate to highly beneficial deals. Already, Ankara anticipates $300 million in annual income from the B.T.C. "This is one of those turning points in history," says BP's Mike Bilbo. "It changed the picture for Turkey overnight."Turkey has almost no natural energy resources of its own, and in fact currently imports the vast majority of its oil and natural gas, particularly from Russia. Turkey, however, seeks to capitalize on its position as the geographic link between Europe and both Central Asia and the Middle East. A member of the Turkish Foreign Ministry was quoted by the media as saying, "Geographically, Turkey is endowed with advantages, so we would like to use those advantages to give Turkey a role as a supplier of energy resources. It gives Turkey relevance." In light of the uncertain nature of global gas and oil supplies, whether as a result of power politics or regional instability, Turkey is banking on the idea that the control of energy supply routes will be as important as the possession of energy itself. In recent months, amid discussion of a proposed pipeline that would send Russian gas through Turkey to Italy and Greece, U.S. Secretary of State Condoleezza Rice warned against increased Russian involvement in European energy security. Rice said, "It's quite clear that one of the concerns is that there could be a monopoly of supply from one source only, from Russia."Azerbaijan and Georgia Seek Economic IndependenceThe Caspian Sea region is one of the most oil- and gas-rich areas of the world; unproven reserves are estimated to be between 100 and 200 billion barrels. Yet exploitation of these resources did not begin until 1991 as a result of underinvestment and inadequate technology. With the collapse of the U.S.S.R., Western governments and corporations began to pursue the former Soviet satellites. The United States supported the creation of the G.U.A.M. Organization for Democracy and Economic Development, an alliance comprising Georgia, Ukraine, Azerbaijan and Moldova that seeks to develop an economic path independent of Moscow.After several years of economic contraction, Azerbaijan enjoyed 26.4 percent G.D.P. growth in 2005, due in large part to its oil output that increased to 477,000 barrels per day. Furthermore, Baku expects 2006 oil revenues of $650 million or more, a figure that is predicted to reach $15 billion annually and reach $160 billion by 2025. As oil began to flow through the B.T.C. pipeline in May, Azerbaijani President Ilham Aliyev stated, "It will bring us on the one hand huge economic benefits, and on the other hand great political capital."However, many problems continue to plague the country: nearly 45 percent of the population live beneath the poverty level; the I.M.F. continues to distribute funds to Azerbaijan through a poverty reduction program; and political corruption is widespread. Massive oil revenues may not translate to an increased standard of living since the use of such funds is at the sole discretion of the president. Regardless, Aliyev speaks of a bright future for his country. "Azerbaijan has great prospects, great achievements and undoubtedly our country will significantly benefit from the operation of the Baku-Tbilisi-Ceyhan oil pipeline," he said. "Every citizen will feel these changes in his everyday life."Georgia, meanwhile, has much in common with both B.T.C. partners: like Azerbaijan, it is struggling to overcome the hardships of the Soviet legacy and the transition to a free market economy; and like Turkey, it possesses few energy reserves of its own and is a net importer of oil and natural gas. Similarly, Georgia hopes to reap the benefits of simply maintaining the pipeline. Georgian President Mikhail Saakashvili labeled the B.T.C. as a "symbol of independence" and stated, "The B.T.C. has united us all. Now we see that the promises given in the beginning of the project have come true. Not only the oil producing countries are important, but also those in which the oil transportation corridors have been built. The project is important from both economic and political points of view."Currently, both states greatly rely on Russia for natural gas, and Tbilisi has accused Moscow of using its energy dependence as a political tool. In addition, BP is also behind the construction of the South Caucasus Pipeline, part of the Baku-Tbilisi-Erzurum natural gas line, which traverses the same route as the B.T.C. and carries gas from the massive Shah Deniz fields in the Caspian to Georgia and Turkey. BP Azerbaijan's president, David Woodward, recently stated that the reserves in Shah Deniz, estimated at 400 billion cubic meters, "should be sufficient to satisfy the domestic needs of Azerbaijan and Georgia" by 2012. Israel's Energy AmbitionsAs is the case with Turkey, Israel is another Mediterranean country seeking to capitalize on geopolitics with regard to the B.T.C. pipeline. Israel imports nearly all of its needed oil -- about 300,000 barrels per day -- with 20 percent coming from Azerbaijan. In recent weeks, Azerbaijan announced that it would be increasing its exports to Israel via the B.T.C. Israel currently imports much of its oil and gas via the Tipline, which extends from Ashkelon on the Mediterranean coast to Eilat on the Gulf of Aqaba and leads into the Red Sea. Tel Aviv and Ankara recently announced in April plans to carry water, electricity, natural gas and oil to Israel by way of a proposed Ceyhan-Ashkelon-Eilat passage. Such a corridor would be controlled by Israel, which many consider a favorable prospect for Western interests, and would allow for the shipment of Caspian and Central Asian gas and oil to Asian markets including India, Japan and South Korea, thereby bypassing Russia entirely.ConclusionThe B.T.C. pipeline is an important new addition to the "Great Game." It underlines the fact that energy routes are becoming equally as important as the gas and oil being transported. With ever-increasing global consumption and energy costs, the relationship between energy resources and political power will only tighten.Turkey will undoubtedly use its newfound clout to attain the most lucrative deal by playing U.S., European and Russian interests against one another. Washington and Brussels, however, will dangle the prospect of E.U. membership in order to coerce Ankara to further Western goals in the region. Meanwhile, Israel will continue to exploit its geopolitical strengths to position itself as an important player in global energy supplies.Russia will continue to convert its immense energy reserves into greater political influence, both within its respective regions and around the globe, by expanding its exports to the rapidly expanding Chinese and Indian economies. Moscow, however, has learned from its gas dispute with Ukraine that drastic measures such as supply cuts destroy customer confidence and can have a negative effect on business.Washington will continue to pressure energy-rich states in the Caspian region and Central Asia to distance themselves further from Moscow and move steadily toward the U.S.-E.U. axis. As the traditional regional power, Russia will make every effort to keep its former satellites within its sphere of influence and undermine the West's energy ambitions. Report Drafted By:Michael Piskur