Boston, 9 March 1999 (RFE/RL) -- An air of unreality has entered into the debate over Caspian Sea pipeline development.
It has been nearly five months since The New York Times reported that the U.S.-backed plan for an oil pipeline from Baku to Turkey's port of Ceyhan "appears to be on the brink of failure."
At the time, the Clinton administration dismissed the report as either unfounded or premature. But the conclusion followed a White House meeting with oil industry executives, who informed officials that they would not support the Baku-Ceyhan plan. The decision on choosing a main export pipeline route was originally scheduled for October 29 of last year.
Since then, the administration has refused to accept the industry's rejection and has mounted a determined diplomatic effort to keep the Baku-Ceyhan scheme alive. To its credit, it has kept the plan from dying entirely, but only at a high and sometimes hidden cost.
For several months, the gap between the US government and the oil industry has appeared to be widening. Officials of the Azerbaijan International Operating Company say their decision on Baku-Ceyhan has been put off indefinitely, but the Clinton administration has continued to press hard for the plan.
The result has been increasing friction and a loss of credibility on the pipeline issue. Much has been due to a series of unacknowledged changes in U.S. arguments.
Last year, for example, the United States insisted that the way to make Baku-Ceyhan commercially viable was to extend the route into Central Asia with a trans-Caspian oil line. This was to be paired with a trans-Caspian gas line that would join to form an energy corridor through the Caucasus.
While a trans-Caspian gas project was announced last month, the idea of a trans-Caspian oil line has apparently been dropped. It was not one of the five pipelines endorsed by the Clinton administration in its latest formulation of policy presented by Ambassador Richard Morningstar in Senate testimony last week.
Officials have yet to explain how Baku-Ceyhan will be viable now without the Central Asian extension, although it seemed so vital to the project before.
Since the trans-Caspian oil line was strongly opposed by Russia, the change seems to bolster reports that an accommodation on the Caspian has been reached with Moscow. Such an understanding is bound to leave Iran more isolated than ever before in protesting development without a legal division of the waterway.
Similarly, US officials have adjusted their arguments about the commercial viability of the Baku-Ceyhan pipeline as the price of oil has dropped. Increasingly, they have stressed that companies must recognize the political reasons for the project. Morningstar also insisted in his testimony that the commercial and political landscape surrounding the pipeline issue has changed, bringing an agreement within reach.
US and Turkish officials have joined in arguing that the oil companies must take into account the cost of a potential oil spill in the Bosporus in making their price comparisons on route options. Since the cost is unquantifiable, such a comparison could justify almost any pipeline price.
At the same time, US officials have proposed a solution to the price problem under which Turkey would guarantee to cover any cost overruns if its construction estimate of $2.4 billion is exceeded. Alternately, there have been suggestions that Turkey could vary its pipeline fees to reflect oil prices. Turkey has resisted such concessions for three years, but some officials now hold out hope that an agreement can be reached as soon as this month.
All these adjustments and refinements are signs of the sheer determination and political will behind the Baku-Ceyhan plan, despite the economic setback of depressed oil prices. Most analysts believe that the pipeline investment is out of the question at a time when companies are reconsidering whether or not to pursue Caspian offshore development itself.
US officials could yet succeed by offering a combination of government financing guarantees and Turkish incentives, combined with political persuasion. But if they fail, the cost to credibility will be high because the governments have brought so many forces and arguments to bear.
Even if the project proceeds, there could be political consequences because the windfall of US official credits amounts to little more than a subsidy to the oil industry.
At times, the push by US officials has seemed comparable to that of private developers in their drive to overcome all obstacles to a project. The determination may be admirable, but in the case of Baku-Ceyhan, it often loses sight of the commercial realities faced by the real developers, the oil companies themselves.
Even the most favorable package of incentives cannot make up for unfavorable oil prices. It was only the promise of oil profits that brought companies to the Caspian in the first place. Subsidies and politics may eventually carry the day, but they are no substitute for investment decisions based on market economics and attractive rates of return.
(Lelyveld is chief correspondent of the Journal of Commerce. He wrote this analysis for RFE/RL.)