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Azerbaijan: Competition Heats Up For Main Export Pipeline

Prague, 18 November 1997 (RFE/RL) - Last week, Azerbaijan formally celebrated the extraction of the first oil from its offshore Chirag field. Chirag is one of three oilfields being developed by a consortium of Western, Russian, Azerbaijani and Turkish companies under the $8 billion "Deal of the Century" signed three years ago.

Present in Baku for the celebration were top executives from the oil companies aligned in the Azerbaijan International Operating Company (AIOC) which is managing the project, together with Russian First Deputy Prime Minister and Fuel and Energy Minister Boris Nemtsov, U. S. Energy Secretary Federico Pena and Turkish Prime Minister Mesut Yilmaz.

The so-called "early oil" from Chirag is for the moment to be exported to western markets via the Baku-Grozny-Tikhoretsk-Novorossiisk pipeline -- the only route currently available. In late 1998 a second pipeline from Baku westwards through Georgia to Supsa on the Black Sea coast is scheduled to be operational. But even these two pipelines together will not be sufficient to transport the volume of Azerbaijani Caspian oil that will come on stream in five or so years time -- let alone an additional volume of crude from Kazakhstan.

Given the huge amounts of oil involved, and the equally impressive sums to be earned in transit fees, it is no surprise that there is fierce competition over the route for the planned Main Export Pipeline. Four alternative routes for this pipeline are currently under discussion: north through the Russian Federation to Novorossiisk, westwards through Georgia to the Black Sea, or south-west through either Georgia or Armenia to the Turkish Mediterranean terminal at Ceyhan.

Guests at the inaugural celebrations availed themselves of the opportunity to make their personal preferences clear. Nemtsov, who hailed the beginning of production at Chirag as symbolizing a new era in cooperation between Russia and Azerbaijan, said there is a "100 percent chance" that the Main Export Pipeline will run north through the Russian Federation to Novorossiisk.

But the U.S. favors south-western Baku-Ceyhan route, in order to strengthen Azerbaijan's independence, undercut Russia's influence in the South Caucasus, and bolster the regional standing of its ally, Turkey. U.S. Energy Secretary Pena reiterated the U.S. preference for the Baku-Ceyhan variant, but was deliberately ambiguous over which countries it would transit.

The issue is of major significance. It has hitherto been assumed that the Baku-Ceyhan pipeline would run through Georgia, and Georgian President Eduard Shevardanadze said last week after talks in Baku with Aliyev that he is certain this route will ultimately be chosen.

But Pena, who stopped off in Yerevan en route for Baku, hinted that the U.S. would welcome routing the pipeline through Armenia to cement a political settlement of the Karabakh conflict. This would constitute a huge incentive to all sides to the conflict not to resume hostilities.

But it would also mean that Georgia would lose out on transit fees, as would Ukraine. The two countries' leaders have signed agreements on cooperation that envisage exporting some of the oil that would be shipped through the planned western pipeline to Supsa onwards via tanker to Odessa, and thence to Europe via the existing "Druzhba" pipeline across Ukraine.

And Bulgarian Foreign Minister Nadezhda Mikhailova last week held talks in Tbilisi, Baku and Almaty on the prospect of her country purchasing some Caspian oil exported westwards to Supsa, and on the planned construction of a further pipeline from the Bulgarian port of Burgas to Alexandroupolos in Greece.

If either the western or the south-western option is chosen, the Main Export Pipeline will almost certainly be used not only for Azerbaijan's Caspian oil but also by Kazakhstan, which is seeking an alternative to the planned Caspian pipeline from is huge Tengiz field across Russia to Novorossiissk.

Kazakhstan is already exporting small quantities of oil via Georgia (by a combination of barge across the Caspian to Baku and railcars from Baku to Batumi). Kazakhstan's President Nursultan Nazarbayev has discussed with both his Azerbaijani and Georgian counterparts the possibility of building an underwater pipeline across the Caspian to link up with the Main Export Pipeline. Visiting Baku this week, Pena expressed his support for the Kazakhstan-Baku underwater pipeline.

Russian Fuel Minister Boris Nemtsov told journalists in Moscow last week that Russia intends to "fight" to secure the routing of the Main Export Pipeline across its territory, possibly undercutting the prices offered by other interested countries for the use of their terminal facilities.

The final decision on the choice of route theoretically rests with the AIOC, and top AIOC executives have made clear on several occasions that their sole criterion is economic. But if the AIOC opts for the northern route, it is possible that the Azerbaijani leadership, under pressure from Turkey and the U.S. might then demand a revision of the terms of the "Deal of the Century."

True, U.S. officials favor more than one major pipeline for the mainstream oil, but even so the cost of the Baku-Ceyhan variant is much greater than that of either the Russian or the Georgian alternatives. In short, the ceremony in Baku marked only a modest victory in the battle for Azerbaijan's early oil. The struggle over who will profit from the export of mainstream oil is only just beginning.