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Azerbaijan/Turkey: Baku-Ceyhan Caspian Oil Pipeline Likely To Win Approval

Boston, 28 September 1998 (RFE/RL) -- As the time nears for a decision on Caspian Sea pipelines, U.S. policy may finally have to face economic reality.

The United States has been promoting multiple pipelines for transporting Caspian energy, but specifically backing an oil pipeline from Baku to the Mediterranean port of Ceyhan, a plan which is strongly supported by both Turkey and Azerbaijan. A decision by the Azerbaijan International Operating Co. is due on Oct.29.

The choice of the Baku-Ceyhan route has seemed inevitable for over a year, thanks to the stated preference of Azerbaijan President Heydar Aliyev. But Western oil companies have been reluctant to endorse the plan because of the enormous expense. The main export pipeline is estimated to cost $2.5 billion but could run as high as $4.5 billion.

Alternate routes through Georgia and Russia could yield some savings, but both would create more tanker traffic through the Bosphorus, which Turkey opposes. Iran could compete with its own north-south route to the Persian Gulf, but U.S. opposition has all but ruled out that option for the consortium.

Washington's campaign for an east-west pipeline has been based on political and strategic calculations, but it has also argued that any route should be commercially viable. In recent months, officials have compromised on the commercial principle by promising government financing from the U.S. Export-Import Bank and other agencies.

Officials may now be ready for further compromises in order to push their east-west plan. Earlier this month, Ambassador Richard Morningstar, the administration's new top official on the Caspian, said that "a Baku-Ceyhan oil pipeline and a trans-Caspian gas pipeline make absolute sense for both national security and commercial reasons."

The statement reflects a significant refinement of U.S. policy. Earlier this year, officials insisted that oil and gas pipelines should be built across the Caspian at the same time to save money by achieving economies of scale. The idea was that east-west oil and gas lines would flow from Central Asia all the way to Turkey.

Industry officials argued that there has never been such a simultaneous transit project anywhere in the world, because of the enormous differences in contracting for oil and gas lines. The Clinton administration has belatedly accepted the argument and is now calling only for a gas pipeline across the Caspian from Turkmenistan.

Several months ago, some officials conceded that barging of oil may be the only way to extend the Baku-Ceyhan scheme, while a separate line from Kazakhstan's Tengiz field to the port of Novorossiysk is being built.

But there are several more steps to go before the policy reflects all the realities. Industry officials say that the long-awaited announcement next month is likely to be only a "route recommendation" rather than the final decision that the world has been waiting for.

The depressed price of oil has not ended the industry's interest in the Caspian, but it has made it more cautious about costly commitments to pipelines. As a result, the recommendation next month will probably be for Baku-Ceyhan, although it may not rule out a change later on.

The project may also be phased or stretched out. Current production from the Caspian is still small. There will not be enough oil to fill a main export pipeline with 1 million barrels a day until the end of 2003 at the earliest.

Washington has also treated all the region's problems as if they are somehow related to oil. Officials have hoped that they can all be solved magically at the same time and, preferably, in time for the route decision next month. Problems as vastly separated as Nagorno-Karabakh, Abkhazia and even democracy in Azerbaijan have all been subject to simultaneous initiatives as if they were ingredients for baking a cake.

Recently, U.S. Energy Secretary Bill Richardson added his input by offering to negotiate the territorial dispute between Turkmenistan and Azerbaijan over the Kyapaz/Serdar oilfield.

But it is now becoming clear that solutions to these problems will not all come out of the oven at the same time, merely to serve U.S. oil or strategic plans. These long-standing issues deserve consideration on their own merits. Any attempt to patch up the region's troubles for the sake of a pipeline decision will only produce worthless agreements that quickly fall apart.

The U.S. dream of being the strongest influence in the region may also be in for an awakening. Because of the pending merger between British Petroleum and U.S.-based Amoco Corp., America may wind up with a much smaller business stake. U.S. government agencies can only finance U.S. companies, creating problems if Britain takes over the lead on the pipeline.

But that possibility will only speed policy changes that should already be underway. In the end, economic realities must dictate the choice of pipelines, no matter how many lines strategic planners may draw on a map.

(Michael Lelyveld is national correspondent for the Journal of Commerce. He wrote this analysis for RFE/RL)