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Caucasus: Pipelines Bring Danger Along With Wealth

(RFE/RL) The transportation of Azerbaijani oil and gas reserves to world markets via Georgia and Turkey promises huge returns for all three countries. But, as a report released in Brussels on 15 February warns, Azerbaijan and Georgia in particular may have a hard time coping with the huge pressures involved with the Baku-Tbilisi-Ceyhan (BTC) pipeline. The report is authored by an independent panel commissioned by the British oil company BP, which is leading the BTC venture. It urges Western investors to contribute more to the development of Azerbaijan and Georgia, but concludes that the final responsibility lies with those countries' own governments.

BRUSSELS, 16 February 2006 (RFE/RL) -- The imminent completion of the BTC oil pipeline, together with that of an accompanying gas pipeline, will have a huge impact on the region.

It will set into motion a chain of oil and gas extraction and transit in which an international consortium headed by the British energy giant BP has invested $22 billion.

Jan Leschly, a Danish business executive, chairs an independent panel set up by BP to assess the implications of the project. Presenting the panel’s latest report in Brussels on 15 February, Leschly stressed the huge scale of the undertaking.

“These are huge projects, both in scale and in strategic importance," he said. "And if you think about the scale of the BTC pipeline, it is expected that pipeline will carry 1 million barrels per day and the SCP [South Caucasus Pipeline], the gas pipeline, will carry about 7 billion cubic meters of natural gas each year.”

Leschly and other members of the panel emphasized that the $22 billion invested by BP and other Western companies is a large sum on a global scale. But given the world’s increasing thirst for energy, there is little doubt of the project’s profitability over its scheduled 40-year lifespan.

The investment also dwarfs the economies of both Azerbaijan and Georgia. According to the CIA World Factbook, Azerbaijan’s estimated gross domestic product (GDP) in 2005 was less than $11 billion; Georgia's was $5.1 billion.

The 'Oil Curse'

Both countries stand to reap some of the profits, but they will be going down a road strewn with pitfalls. The record of oil-rich countries is so poor that a World Bank study recommended in 2003 that no more money should be made available to them to fund oil extraction. The study was shelved, however, and the report by the BP panel argues that its conclusions are too gloomy.
"The 'oil curse' can have devastating social and political effects, including rampant corruption, bad governance, tensions between different communities within the country...and leading often to civil war, to internal conflict."

However, the panel warns that Azerbaijan, which will reap most of the gains by providing the oil and the gas, is particularly vulnerable to the so-called oil curse. Mohamed Sahnoun, an Algerian diplomat on the panel who has held a series of high-profile appointments at the United Nations, offered a brief overview of the dangers facing countries like Azerbaijan.

“The 'oil curse,' as it is known, can take many forms," Sahnoun said. "As an economic phenomenon, its symptoms can include rapid inflation, the stagnation and sometimes even the collapse of the non-oil sector, and dependence on imports. In its more advanced form, the 'oil curse' can have also devastating social and political effects, including rampant corruption, bad governance, tensions between different communities within the country, sometimes between the central government and local government, and leading often to civil war, to internal conflict.”

The report says that the danger to Azerbaijan has become more imminent in recent months, with oil and gas prices reaching unprecedented heights. It says, however, that the final responsibility of handling the pressure rests with the Azerbaijani government, which should do all it can to promote economic and political reforms, ensuring democratic participation, development of civil society, respect for human rights, and transparent financial management.

Importance Of Social Investment

BP and its fellow investors can only play a supportive role. But, as the report notes, the companies could be held responsible if things go wrong with the pipeline project. The report recommends that BP and others should reinvest part of their profits into the region.

Stuart Eizenstat, another panel member and formerly a high-ranking U.S. official, said BP’s Regional Development Initiative (RDI), which invests $20 million a year into the region, is a good start, but is not enough. "We are impressed with this progress, but, being an independent panel, we believe that improvements need to be made if BP is going to have the kind of long-term impact in the region they have indicated they want to have with greater [regional] coherence of the various programmes across the three countries," he said.

"And they need to integrate environmental objectives across the entire RDI program," Eizenstat added. "To date, for example, there are no substantial environmental programs in RDI beyond a biodiversity program -- which, while important, is not complete. In addition, we have recommended in this report that BP dramatically increase its financial commitment to the RDI.”

Georgians criticizing Russian President Putin for Gazprom price hikes last month (epa)

The report also expresses concerns that governments in the region could commit human rights abuses in the name of pipeline security. The commitments assumed by Azerbaijan and Georgia in this respect are voluntary. The report says that BP “may need to press” Azerbaijan and Georgia to promote good governance and sound economic development.

With regard to Azerbaijan, the report says it is particularly important that the Oil Fund set up by the government remains transparent and subject to international accounting standards. The report says BP should encourage transparency in Azerbaijani government expenditure. It praises Azerbaijan’s voluntary participation in an Extractive Industries Transparency Initiative, but notes that more needs to be done. The panel on also noted that Azerbaijan came in 137th in a recent corruption study involving 159 countries.

The report says BP and its Western partners themselves should make public all payments made to the Azerbaijani government.

In Georgia, BP has announced a $14.5 million-a-year grant program, which the report finds sufficient. However, it notes a very large number of grievances related mostly to property issues along the routes of the pipelines. The report says BP and its partners have not been able to convince the local population of the impartiality of the appeal bodies they have set up. Environmental concerns also persist.

A particular challenge with regard to Georgia is what the report terms the “incongruity” of more than 1 million barrels of oil and equally significant amounts of gas flowing through or near villages and towns where houses have no heat or electricity. It notes such a situation is not sustainable. The report suggests BP can help develop Georgia’s internal gas-distribution network. Also, it says, Azerbaijan and Turkey could assist Georgia with sales of natural gas, and, in the case of Turkey, provision of electricity.

The report did not address Armenia, which was excluded from pipeline routes. Stuart Eizenstat said this was partially due to Yerevan’s dispute with Azerbaijan over Nagorno-Karabakh, but went on to suggest the existence of the pipelines could contribute to its solution.

“I can’t say that the pipeline itself necessarily has led to this, but there are now some discussions which I hope will be promising between Azerbaijan and Armenia to try to deal with that issue,” Eizenstat said.

Eizenstat said the Baku-Tbilisi-Ceyhan pipeline has already contributed to regional cohesion, citing Azerbaijan’s decision to help Georgia after this winter’s disruption in Russian gas supply. Such cohesion, Eizestat said, “will be to the benefit of Armenia as well.”

Russia's Gas Strategy

Russia's Gas Strategy

RUNNING HOT AND COLD The crisis over Russian supplies of natural gas to Ukraine that erupted on New Year's Day has implications that spread well beyond these two countries and will impact both economic and political policymaking throughout Europe. On January 19, RFE/RL's Washington, D.C., office hosted a briefing the examined the ramifications of the natural-gas conflict.

CLIFFORD GADDY, a senior fellow at the Brookings Institution, outlined Russia's "grand energy strategy," in which Ukraine is perceived as merely an obstacle frustrating Russia's energy ambitions in Western Europe and therefore a nonentity in Russia's broader strategic planning. According to Gaddy, Russia's strategic goal regarding energy is to maximize the role of its own energy resources in the world energy markets, so as to increase its geopolitical influence. To do this, it must reduce competition and maximize dependency on its own energy resources, as well as ensure a stable supply.

TARAS KUZIO, a visiting assistant professor at George Washington University, rebutted Gaddy's argument, claiming that Russia's actions evidenced a complete lack of geopolitical strategy and resulted in strong denunciations by Western countries and a loss of political allies in Ukraine. According to Kuzio, Russian President Vladimir Putin's desire to have a deal signed by the January 4 European Union energy summit outweighed his hope of reinforcing opposition to Ukrainian President Viktor Yushchenko during the run-up to Ukraine's March 26 parliamentary elections.

RFE/RL Coordinator of Corruption Studies ROMAN KUPCHINSKY did not fully agree with Kuzio's assessments of Yushchenko or Ukraine. He outlined three major problems that are feeding the conflict between Russia and Ukraine. The biggest, he argues, is that the state-controlled Russian gas giant Gazprom holds a monopoly on natural-gas sales outside the CIS. Kupchinsky also decried Ukraine's consumption of natural gas, terming it "out of control." Corruption is also a major factor in the conflict, Kupchinsky said, although the extent to which it taints the deal struck between Russia and Ukraine remains unknown.


Listen to the complete panel discussion (about 90 minutes):
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