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Caspian: Views Differ On Viability Of Oil Pipelines

Washington, 4 March 1999 (RFE/RL) -- The U.S. government's top official shepherding America's support for multiple oil and gas pipelines from the Caspian Sea says there is substantial progress toward that goal and that the major pipeline from Baku to Ceyhan is economically feasible.

Two representatives of American business firms being encouraged to build and use the pipelines, however, say that isn't necessarily so. They say that if the projects don't show promise of a reasonable return, the private investors will simply walk away.

The clash of views came Wednesday at a hearing before the U.S. Senate Foreign Relations Subcommittee on International Economic Policy. It was reviewing whether the main U.S. supported oil pipeline, which is to run under the Caspian from Turkmenistan to Baku, Azerbaijan, then on through Georgia to the Turkish Mediterranean port of Ceyhan, is economically viable.

Richard Morningstar, U.S. President Bill Clinton's special advisor for Caspian Basin energy diplomacy, told the subcommittee that with price incentives from Turkey for construction and transmission fees, along with a guaranteed cap on the cost of the total project, the Baku-Ceyhan pipeline is viable.

But Mike Stinson, senior vice president of Conoco oil company, told the subcommittee that there is a big difference between commercially "viable" and commercially "attractive." If projects are viable but only marginally economic, they will not attract the private sector capital which will make them a reality, he said.

Conoco is a major participant in many of the Caspian sea projects, but Stinson said there are factors which are making the Caspian less attractive than it appeared to be two or three years ago, while opportunities in Saudi Arabia and other places are looking more appealing as places for the oil companies to invest their money.

A key factor, said Stinson, is that most energy companies working in the region "believe a transport route through Iran would be highly competitive and probably represent the lowest capital costs."

Unilateral U.S. sanctions against Iran hurt American companies, he said, because the most optimal transport routes out of the region appear to be through Iran. A major part of the infrastructure already exists there, he said, and a spur line costing a mere $50 million could be built connecting with Turkmenistan to facilitate oil swaps to the Persian Gulf for export.

The head of PSG, an American joint venture which just two weeks ago signed an agreement with Turkmenistan to lead development of the Trans-Caspian gas pipeline project, warned that unless some major jurisdictional disputes are settled quickly, the gas pipeline could be left unbuilt.

PSG President and Chief Executive Officer Edward Smith told the subcommittee that the proposal to carry gas in a pipeline from Turkmenistan under the Caspian to Baku, and then overland through Georgia to Ankara, "will not succeed" if the substantial jurisdiction issues over the route of the pipeline and the regulatory regime that will govern it are not resolved.

Smith said his company expects the pressing problem of dividing jurisdiction between Azerbaijan and Turkmenistan will be solved soon, but the broader questions of jurisdiction in the Caspian sea itself are nowhere near being fixed. Unfortunately, he said, it is "virtually certain that agreement will not be reached in the time required to support the development of the project."

Making it even more difficult, he said, is the fact that Iran is strongly opposing the Trans-Caspian gas and oil lines. Smith said PSG and it's owners Bechtel construction and GE Capital still believe the gas pipeline is an economically possible project, but also warned that it could be stopped short if the Blue Stream gas pipeline project gets there first.

Blue Stream, backed by Russia's Gazprom and Italy's ENI, would carry gas under the Black Sea to Samsun, Turkey, then on to Ankara.

The Blue Stream project faces more serious technical problems because of the depth of the Black Sea, he said, and it would make Turkey essentially totally dependent on Russian gas for years. "Russia has already shut off the existing gas lines that could accommodate export of Caspian Basin gas through Russia to markets in Turkey and elsewhere in Europe," said Smith, a warning of the dangers of one country controlling all the pipelines.

Still, he said, while Turkey's demand for natural gas is great, it is not big enough to support both the Blue Stream and Trans-Caspian projects at the same time.

What's important for the Trans-Caspian line, said Smith, is for the U.S. government to move ahead quickly in encouraging the Caspian Sea countries to reach agreement on the division of the sea bed resources and the water's surface.

Ambassador Morningstar said the U.S. government will not provide direct subsidies for any of the oil or gas pipelines out of the Caspian region, but has put together financing, loan guarantees and investment insurance from U.S. export support and investment guarantee agencies.

But in the end, he said, it is up to the countries and the companies of the Caspian to work together to develop commercially attractive and environmentally sustainable projects.

Despite Morningstar's optimism, the commercial company officials say the Caspian pipelines are still some distance from a sure thing.