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Caucasus: Deadline Nears On Oil Transit Routes

Boston, 16 June 1998 (RFE/RL) -- As the deadline approaches for a decision on Caspian transit routes, governments are preparing to spend huge sums on strategic projects that may make little economic sense.

The goal of the United States is to promote an east-west pipeline route that can join Azerbaijan and Central Asia with Georgia and Turkey, avoiding Russia and Iran, no matter what the cost. With U.S. encouragement, Azerbaijan has set an Oct. 1 deadline for deciding on the main export pipeline route.

But the Western oil companies involved in Caspian offshore projects have proved so reluctant to support the east-west plan that a top Azerbaijani oil official became openly critical last week. Ilham Aliyev, vice president of the State Oil Company of the Azerbaijani Republic, known as SOCAR, said that members of the country's largest consortium are trying to stall construction of a pipeline from Baku to the Turkish port of Ceyhan.

The unwillingness of the companies over many months has compelled the concerned governments to take extraordinary steps. Earlier this month, Turkish Energy Minister Cumhur Ersumer said that his country is ready to finance construction of the Baku-Ceyhan pipeline, if necessary.

At a conference in Istanbul, U.S. officials said that the Export-Import Bank and other agencies are prepared to invest $6 billion in Caspian projects. Azerbaijan officials believe that the US government funding will be made available for the pipeline plan.

The offers represent a major change in U.S. policy. Six months ago, government officials insisted that the pipeline would have to be commercially feasible and funded by the private sector. They all but ruled out a role for government finance. But the high cost of the project has made commercial success unlikely at a time when oil prices are low and the volume of Caspian production seems uncertain.

Although Azerbaijan has signed nearly $30 billion worth of deals, oil companies are disappointed with the returns so far. Some wells drilled in the Caspian have come up with gas rather than oil, while others have turned out to be small or even dry. Despite the enormous attention given to the Caspian and its long-term strategic value, oil company officials say that the volumes produced so far would not justify the cost of Baku-Ceyhan line.

Officials say that a well to be drilled at Azerbaijan's Shah Deniz offshore oilfield in the next two weeks may determine whether the West's high hopes for the Caspian have been warranted. Ironically, this is the same field that Iran has obtained an interest in to compensate it for being excluded from the Azerbaijan International Operating Company.

Another big problem for the companies is skepticism about the cost estimates being used by governments for Baku-Ceyhan. Most government officials have been using a $2.3 billion estimate, while the companies believe that $4.5 billion is closer to the truth. Several billion may be added for the cost of building a trans-Caspian line from Baku to Turkmenistan. Central Asian volumes are seen as essential to justifying the entire east-west scheme.

As commercial interests have wavered, governments have jumped into action, trying to defend against a strategic loss. Washington is particularly worried that Iran may offer the cheapest alternate route. The United States may only be able to make up the difference in commercial viability with political will.

The U.S. effort to put politics over economics already seems to be evinced by the Export-Import Bank's announcement last month of a $96 million project to upgrade Turkmenistan's gas pipelines. The work is being undertaken on the pipelines leading to Russia at a time when no gas has been exported through the lines since March 1997.

Bank officials say the work is needed because the Soviet-installed lines are old and likely to leak, although they concede that no gas has been flowing for over a year. They also note that the bank's part in the plan is only a loan guarantee with repayment assured by the Turkmenistan government.

But the more obvious reason for the U.S. financing is to promote Washington's political interests with Turkmenistan, showing that there will be rewards for participating in the east-west pipeline plan. The Export-Import Bank is likely to be the major vehicle for U.S. government financing of the pipeline project, because it requires no budgetary funds or congressional approval. Such funding can take place whether the Baku-Ceyhan line makes any economic sense or not.

In 1993, the bank played a similar role in providing $2 billion in financing for Russia under a program known as the "oil and gas framework agreement." The guarantees for equipment sales to rehabilitate old Russian oil wells took years to negotiate and required an unprecedented exemption from the World Bank's liens on Russia's resources. At the time, Moscow was defaulting on other loans, and there were similar objections that the oil program could not be justified as a sound business decision.

But the U.S. showed its overwhelming political will in pushing the program despite all obstacles. In the end, the agreements were signed but the credits went virtually unused for years.

There may now be a similar scheme by governments for the Baku-Ceyhan pipeline. Political momentum seems likely to replace oil production as the project's driving force.