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Caspian Sea: Pipeline Trouble Persists

Washington, 14 December 1998 (RFE/RL) -- Governments and companies in the Caspian Sea region are putting on brave faces as oil prices plunge, but many will have to deal with serious financing problems if the trouble persists.

At an industry conference in Washington last week, officials continued to insist that costly pipeline projects will proceed and that investors will take the long view. Oil prices will recover, they said, although they admitted that the damage to profits has already gone far beyond their worst forecasts and fears.

On the surface, U.S. policy in promoting an oil pipeline from Baku to Turkey's Mediterranean port of Ceyhan is making great strides in spite of delays. There is equal interest in a trans-Caspian gas line from Turkmenistan to Turkey, a project that seemed incredible a year ago.

At the Washington conference, organized by Cambridge Energy Research Associates and the U.S.-Russia Business Council, there was a growing consensus that both lines will be built, creating an east-west export corridor that bypasses both Russia and Iran.

The problem is that the policy has not kept pace with the numbers. With oil below 10 dollars a barrel, it makes no difference whether the projects involve the development of oil, gas or pipelines. Companies are already cutting their capital spending, and the Caspian projects are some of the costliest in the world. Financing is likely to be scarce until energy profits improve.

Many participants at the conference argued that pipeline systems are designed to last for 30 years or more. It should follow that today's oil prices are less important than those a decade from now.

But the average price of oil in 1998 has already sunk to the lowest point in 22 years. As a result of depressed prices, U.S. production has tumbled to a 44-year low. It seems clear that the depth of the industry's difficulties will be considered when investment decisions are made.

The uncertainties of the Caspian projects could also make them the first to be put on hold. Without firm agreements on pipeline routes, it is impossible to win financing. It will also be difficult to compete for scarce funding resources against projects with known costs.

The problem has already been seen in this month's decision by Unocal Corp. to drop its controversial project with Turkmenistan to pipe gas through Afghanistan to Pakistan, three years after signing a contract with the government of President Saparmurat Niyazov.

A Unocal spokesman said the cancellation was "a natural" casualty of cost-cutting because the project had already been suspended after the U.S. bombing of training camps used by Osama bin Laden, the man accused of leading terrorist bombings this summer of U.S. embassies in Tanzania and Kenya.

Any degree of uncertainty may now work against projects as companies tighten their budgets. Some company officials argue that Caspian projects like that of the Azerbaijan International Operating Co. will go forward because over 1,000 million dollars has already been invested. But others that are less advanced may be in doubt.

Even for AIOC, the future is unclear. According to a company official, the consortium estimates total costs for its oil at 7 to 9 dollars a barrel, based on transport costs of 2 to 4 dollars.

AIOC is working to minimize transit charges, which will depend on its choice of pipelines. But with the January futures price for Brent crude hitting 9.68 dollars in London on Thursday, there may be little room for return on investment unless prices rise. The oil slump is bad news for the companies and their projects, but it is even worse for the countries of the Caspian region. The republics can expect many billions (thousand million) of dollars over the life of their oil contracts, but they have very little to show for them now.

Turkmenistan is gradually increasing its oil production, but it has had virtually no export earnings from gas since Russia closed its pipeline in March 1997.

Azerbaijan is seeking more aid from the International Monetary Fund after making no money on oil exports this year. Despite all the foreign investment in Kazakhstan, the country may be forced to sell off its petroleum industry unless oil prices improve.

The administration of President Bill Clinton has also refused to license U.S. companies to conduct oil swaps with Iran from the republics, a step that could bring them some income until export pipelines are built. Meanwhile, the wrangling over pipeline routes goes on indefinitely.

Yosef Maiman, the president of Israel's Merhav Group, who also serves as a special ambassador and adviser to President Niyazov, put it best: "I don't think this region has 10 years. I don't think this region has five years. Unless something is done in the next one-and-a-half to two years, then next year when we meet, we will not be discussing 2020," Maiman said at the conference.

Maiman believes Turkmenistan may be able to win some financing for its economy once agreements are signed to start work on a trans-Caspian gas pipeline. But the economic future of the republics is far less certain than it was last year.