Global Market Brief: The Geopolitics of Baku-Tbilisi-Ceyhan June 01, 2006 19 30 GMT

The Baku-Tbilisi-Ceyhan (BTC) pipeline, a year behind schedule and some 30 percent over budget, is now a reality. Though the project will not be officially inaugurated until July 13, the approximately 1,118 mile, $4 billion line has already begun operations, with crude already pouring into storage tanks overlooking the Mediterranean Sea. By the end of 2006, the BTC project will be pumping 300,000 barrels per day (bpd) of Caspian crude to the Turkish port of Ceyhan on the Mediterranean Sea. By 2008, the BTC will meet its full throughput capacity of 1 million bpd. On average, half of that crude will come from Azerbaijan and the other half will come from Kazakhstan.That was not the original plan. Initially, the bulk of the BTC crude was expected to come from Azerbaijan. Azerbaijan's reserves, however, did not live up to the hype, requiring an expectations adjustment. Regardless, the BTC project went ahead as planned -- and it was damn lucky Kazakhstan was brought on board. Kazakh crude will cross the Caspian Sea in small oil tankers for loading into the BTC at Baku, Azerbaijan. Kazakh and Azerbaijani authorities expect to finalize all the agreements needed to make this arrangement possible before the end of June.Such a business plan makes one wonder about the economic underpinnings of the BTC -- and well it should. Of the various means of shipping crude out of the Caspian region, the BTC is the least economically viable. Not only does the BTC negotiate three states, it also traverses long stretches of mountainous territory. Unlike natural gas, moving liquid oil -- every seven barrels of which weighs about a ton -- up and down mountains is hardly child's play from an engineering standpoint.It would have been far easier, cheaper and faster to simply link the Azerbaijani oil fields north into the Russian pipeline network or south into the Iranian network. Throwing in Kazakhstan, which is on the wrong side of the Caspian Sea, left economists doubly perplexed. Moreover, the line ends on the Mediterranean, a body of water whose littoral states already have enough oil. Caspian crude is needed in Asia, not Europe. And that's not all. In addition to being technically challenging, expensive and geographically questionable, the line also threads its way through some extremely dangerous regions. Before the pipeline even gets out of Azerbaijan, it must skirt around the secessionist region of Nagorno-Karabakh, which broke from Baku during the transition from Soviet rule. In Georgia, things are far worse. There, the BTC was routed to avoid not one, but three restive regions. The first two -- South Ossetia and Abkhazia -- broke away from Tbilisi in 1993. Even after 13 years of on-again, off-again ethnic cleansing, more ethnic Georgians live in these regions than Ossetians or Abkhazians, respectively. The other region -- Samtskhe-Javakheti -- is an ethnic Armenian enclave that, while still part of Georgia, hosts a Russian military base that poses a challenge to Georgian sovereignty over the region. And while Georgia and neighboring Chechnya consider themselves on the same side in the sense that they both oppose Russian activity in the region, Chechen fighters played a decisive role in fighting against the Georgians in the Abkhaz and South Ossetian secessionist wars. The winds change quickly in the Caucasus, and when they change, they change completely.Even in Turkey -- a far more cohesive state than either Azerbaijan or Georgia -- the line follows an expensive and winding route to avoid the country's increasingly restive Kurdish regions.
In all cases, the BTC project's operation will flood cash into the coffers of the states involved. Turkey expects to make $300 million annually from transit fees alone, while Azerbaijan's gross domestic product will likely double within five years as a result of the project. A fair portion of such money will undoubtedly be used to assert the power of Ankara, Tbilisi and Baku over Diyarbakir, Sukhumi, Tskhinvali, Akhalkalaki and Stepanakert -- giving all of those secessionist regions reason to want the BTC offline. If the Iraq experience has taught the oil industry anything, it is that oil pipelines are notoriously easy to disrupt, and the BTC is more than five times the length of Iraq's northern export system, which insurgents have essentially shut down since 2003.So why build an economically questionable and militarily insecure project?The answer is geopolitics. The Soviet Union's dissolution left Azerbaijan and Georgia shattered and impoverished. They were also left sandwiched between Russia, their former colonial master, and Iran, which had a vested interest in ensuring that its own 17-million-strong Azerbaijani population did not take any cues from the now-independent 8-million-strong Azerbaijan to their north. The American-European solution was to link the two states in an east-west corridor to themselves and Turkey, rather than simply allow them to languish in Russia's shadow or fall into the orbit of a resurgent Iran -- and they directed their respective government-linked financial institutions to help finance the project.The greatest threat to the BTC project comes from Russia. Moscow serves as the ultimate (if informal) security guarantor of Abkhazia, South Ossetia, Samtskhe-Javakheti and Nagorno-Karabakh -- regions Russia has backed in order to keep pro-Western Azerbaijan and Georgia off-balance. As the project was specifically designed to cut Russia out of the loop, one can easily imagine what the Russians would like to see done to the pipeline. And considering Moscow's cordial relations with these secessionist (or quasi-secessionist, in the case of Samtskhe-Javakheti) regions, one can equally easily imagine what tools could be brought to bear against the pipeline.Yet, irony of ironies, the greatest hope for the BTC also comes from Russia, which is, if anything, actually working to restrain secessionist groups in the region from acting against the project. The single largest investor in the BTC, as well as the oil fields in Azerbaijan that will help fill it, is supermajor BP Amoco. BP also happens to be the single largest foreign investor in Russia proper, and its merger with local oil firm TNK was personally arranged and blessed by none other than Russian President Vladimir Putin himself. While relations between Russia and the West are certainly cooling, they have not yet reached the point where Russia is willing to take serious economic hits to protect its geographic space. But in the aftermath of Ukraine's Orange Revolution, the Russians have been reformatting their foreign and security policies into more confrontational forms, and have not shied away from using energy policy as a tool to further national goals. Whether Russia will attempt to take the BTC offline is not a question of if, but of when, and the only restriction on Russian action is a pending decision at the highest level of government on whether to advance Russian policies to a new stage.Project participants in the BTC include BP (30.1 percent), the State Oil Company of the Azerbaijani Republic (25 percent), Unocal Corp. (8.9 percent), Norway's Statoil (8.71 percent), the Turkish Petroleum Corp. (6.53 percent), Italy's ENI (5 percent), France's Total (5 percent), Japan's Itochu Corp. (3.4 percent), ConocoPhillips (2.5 percent), Japan's Inpex Corp. (2.5 percent) and Amerada Hess Corp. (2.36 percent).