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Azerbaijan/Iran: Oil Feud Flares In Tough Economic Times

Boston, 21 December 1998 (RFE/RL) - Tempers are flaring in relations between Iran and Azerbaijan once again, as tensions over Caspian Sea oil are heightened by tough economic times.

The countries have been feuding over their competing claims to Caspian oilfields. The trouble follows both a long history of discord and more recent conflicts in the quest for the region's oil wealth.

Any disagreement between the two neighbors is likely to have echoes of old ethnic and territorial disputes. Baku often refers to Iran's northwest province of Azerbaijan as "Southern Azerbaijan," raising hackles in Tehran. The issue is particularly touchy because many of Iran's ruling elite are ethnic Azeris. Obvious religious differences also separate the Islamic Republic from secular Azerbaijan.

The Caspian seems to have become a new arena where old antagonisms may be played out. But there is little doubt that the international rush for the Caspian's riches has made matters worse.

The renewed frictions have followed U.S. efforts to prevent Iran from gaining Caspian Sea export routes. Over the past four years, Washington has been most successful with Azerbaijan in promoting the exclusion policy among the Caspian states.

On Nov. 17, the effort to shut out Iran achieved another victory as the Azerbaijani parliament formally rejected a compromise plan that would have allowed an oil pipeline route from Baku to Turkey's port of Ceyhan through Iranian territory instead of through Georgia. Iran reportedly argued that the route would be cheaper and would also allow a branch to the Persian Gulf.

Further quarrels followed quickly. On Dec. 10, Iran informed Azerbaijan that it would stop buying its petroleum products next year because the prices were too high. Last year, Iran was Azerbaijan's biggest customer for oil products, accounting for $180 million in exports, according to Azerbaijan government figures.

Also on Dec. 10, Azerbaijan accused Iran of encroaching on its territorial waters by planning to sign a deal for a Caspian oil exploration study with Royal Dutch/Shell and Britain's LASMO Plc. This week, Iran rejected the complaint. Tehran has been seeking a 20% share of the Caspian's resources. Azerbaijan has threatened to bar the companies from its waters if they follow through on their plan.

It is hard to tell whether the conflict is new or simply the continuation of an old one. In 1995, Baku cancelled an offer to give Iran a share in the huge offshore project of the Azerbaijan International Operating Co. at the request of the United States. Iran reacted sharply by closing its border with Azerbaijan and cutting electricity supplies. In 1996, Baku responded by compensating Iran with a share in its Shah-Deniz offshore field.

Since then, relations have warmed and cooled sporadically. Last year, Iranian President Mohammed Khatami extended an olive branch. In August, Foreign Minister Kamal Kharrazi visited Baku for Caspian talks but made no progress on division issues. President Heydar Aliyev has also visited Tehran, but there is clearly not enough trust to keep tensions under control.

It is clear, however, that the mutual anger has been aggravated by Washington's relentless pursuit of its pipeline policy, which can only succeed if Iran suffers a total loss.

Whenever relations between Azerbaijan and Iran improve, they quickly worsen when the subject turns to pipelines or Caspian oil. It is probably not a coincidence that the latest row follows reports that Total SA of France is interested in building an oil pipeline from Baku to the Iranian refinery at Tabriz. The United States is likely to lobby hard against such a project.

The Clinton administration has still not convinced the members of the AIOC consortium to support its preferred route for the Baku-Ceyhan pipeline. But it has had remarkable success in delaying a rejection of the plan while keeping all sides bargaining over the costs.

The U.S. has also persuaded Turkmenistan to back a trans-Caspian gas pipeline instead of an alternate route through Iran. This week, U.S. officials also induced Turkey to disavow its plan to buy gas from Iran, despite reports that it is already building a pipeline to the Iranian border.

It is likely that Iran's anger at Azerbaijan is representative of similar feelings toward Turkmenistan and Turkey, although the potential for pipelines may keep emotions toward those countries in check. As for Azerbaijan, its objection to the Iranian exploration is similar to its border dispute with Turkmenistan over the Kyapaz/Serdar oilfield.

The arguments will become increasingly fierce as regional economies decline with the price of oil. The earnings from oil sales are vanishing for many producing nations, which may soon become desperate for pipeline fees and loans based on future revenues.

As the conflicts multiply, the rosy visions of pipelines for peace have become little more than a fairy tale. The reality is that the pursuit of oil and political agendas could keep Caspian neighbors at odds for years.

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