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Azerbaijan/Turkmenistan: Caspian Pipeline May Be Competitive Again

Washington, 10 August 1999 (RFE/RL) -- The decision by Royal Dutch/Shell to join in building a trans-Caspian pipeline could turn the region's stalled competition into a race once again.

Shell announced Friday that it has formed a partnership with Turkmenistan to develop gas fields for the pipeline to Turkey. It has also agreed to join the PSG International consortium to build the gas line, combining with U.S.-based Bechtel and General Electric.

Shell's new role could give the plan an instant shot of credibility at a time of growing doubts. PSG hopes to complete the 2,000-kilometer project by 2002. But by that time, Russia's Gazprom and Italy's ENI also plan to be pumping gas to Turkey with their Blue Stream line across the Black Sea. Iran has also said that it will finish its gas line to Turkey by 2001. One of the contestants seems certain to lose.

To make matters worse for Turkmenistan, Azerbaijan discovered a huge volume of gas in the Caspian in June. The trans-Caspian line must cross Azerbaijan, but now Baku may be able to supply Turkey with gas that is closer and cheaper than Turkmenistan's reserves.

Shell's entry could give Turkmenistan a boost to overcome all these problems, particularly if Turkey makes a firm contractual commitment to the trans-Caspian project and Turkmenistan's gas. In May, Turkey signed a purchase and sales contract with Turkmenistan, but it included flexible pricing that may be reviewed every six months. The deal could be vulnerable if Azerbaijan undercuts Turkmenistan's price.

Analysts believe that Shell's leverage is with Turkey, because it has no stake in any of Azerbaijan's offshore projects. But Shell is also a partner with Bechtel in a Turkish joint venture to build power plants that will generate electricity from imported gas.

Shell, which has looked for ways to participate in the Caspian, had previously hoped to construct a gas pipeline from Turkmenistan to Turkey through Iran. But last year, officials said Iran had decided to pursue the project by itself, using its own gas.

So far, Azerbaijan's reaction to the Turkmen breakthrough appears to be mixed. Turkmenistan President Saparmurat Niyazov said that he received support for the pipeline from Azerbaijan President Heidar Aliyev during a phone conversation Thursday. But Natig Aliev, the head of the State Oil Company of the Azerbaijani Republic, said the country might choose to build its own line to Turkey instead, if its demands are not met.

Turkmenistan and Azerbaijan have been feuding for two years over the ownership of Caspian oilfields, although their public position is that the border dispute should not derail the trans-Caspian gas plan.

Perhaps the most important gain for Turkmenistan from Shell's participation is the prospect of help for the country's cash-starved economy. Shell has reportedly agreed to finance half of the project, which has been estimated at $2.5 billion. The commitment could allow the country to win interim loans that would keep it afloat.

Nearly all other avenues of Turkmenistan's gas exports have been cut off. Although the country has the capacity to export as much as 90 billion cubic meters of gas annually, it produced only about 13 billion cubic meters last year.

Turkmenistan has never recovered from the shock of its dispute with Gazprom, which halted exports through Russian pipelines in 1997. A deal with Ukraine temporarily raised Turkmen output to 16 billion cubic meters this year, until Kiev proved unable to pay. An agreement to export 4 billion cubic meters annually to Iran has resulted in exports of less than 900 million cubic meters this year. A plan to pipe Turkmen gas to Pakistan has been stalled by the war in Afghanistan. Azerbaijan's discovery of competing gas in the Caspian seemed to be the last straw.

But while Shell could put Turkmenistan back in the race, Russia may have more cards to play. Gazprom regards its Blue Stream project to Turkey as its highest priority. It also controls Turkmenistan's northern line through Russia, which was its link to European markets in Soviet days.

Moscow could frustrate the trans-Caspian project by accelerating Blue Stream while simultaneously opening up the northern connection, arguing that a new Turkmen outlet is unnecessary. It could then join with Iran to press their case that the trans-Caspian line is environmentally risky and illegal without a littoral pact on dividing the waterway.

Ultimately, the flood of gas supplies into Turkey raises the chance that prices will plummet, even if agreements are signed. That prospect may give pause to pipeline builders, particularly if all the competitors are set to start at the same time. It is unlikely that all of them can win the Turkish gas race.