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Azerbaijan: Caspian Sea Pipeline Gets Major Backing

The proposed Caspian Sea oil pipeline is getting a boost. The oil company BP Amoco says it will support construction of the massive project. RFE/RL's Michael Lelyveld takes a look at the issues.

Washington, 20 October 1999 (RFE/RL) -- Plans to build a Caspian Sea oil pipeline to Turkey took a surprising step forward Tuesday as BP Amoco announced that it has decided to support the construction of a line from Baku to Ceyhan by 2004.

A company official in Washington confirmed reports from London of a change in BP Amoco's position on the main export pipeline, which has been promoted by the United States, Turkey, Azerbaijan, and Georgia. Although it previously resisted, the company will now join in efforts to find financing for the controversial project.

"The change is that we've come to the conclusion that this Baku-Ceyhan line is a strategic transportation route and that it should be built," said Michael Townshend, BP manager of international affairs, in an interview with RFE/RL.

As the major shareholder in the 11-member Azerbaijan International Operating Company (AIOC), BP Amoco's decision is bound to carry weight. Technically, the choice of a route rests with the government of Azerbaijan. But the line cannot be built without backing from the $11 billion consortium. The BP Amoco move is a setback for Russia's rival proposal for a northern route to Novorossiysk. Georgia has also been in the running with a route to its port of Supsa.

For over a year, BP stood firm in the face of U.S. government pressure, arguing that AIOC volumes of oil production at their peak would still not justify building a line to carry one million barrels of oil per day. But after months of negotiation, the company is now taking the initiative.

"We're willing to undertake a full engineering design study, and we're willing to commit our volumes as they come on stream," Townshend said.

At the present time, BP Amoco has no other Caspian volumes besides those that come from AIOC. The five-year-old project is producing about 115,000 barrels per day. Production is expected to rise to 800,000 barrels per day in 2007. But the company now says it can channel oil from its other Caspian ventures when they come on line. It will also enter into talks with other companies to seek exports from projects in Kazakhstan and Turkmenistan. Kazakhstan already ships Caspian oil through the Caucasus by a combination of barge, tanker and rail.

BP has held out for a series of concessions on Baku-Ceyhan, and there is little doubt that it will try to get more in the area of finance. Turkey has agreed to guarantee costs that exceed $2.4 billion. Townshend said the company will now try to go beyond U.S. official pledges in the form of loan guarantees and explore the possibility of direct investment by governments and multilateral lenders like the World Bank.

Company officials are also making a distinction between the strict commercial nature of oil exports and the "geo-strategic" aspect of the Baku-Ceyhan project. U.S. officials have argued for years that the 1,730-kilometer line is needed to tie the countries of the Caucasus and Central Asia to the West, even if the cost is too high.

BP officials say they will back the commercial portions of the pipeline but not the "geo-strategic" costs. When asked how the two can be separated, officials say that AIOC may undertake pipeline construction through Azerbaijan and Georgia, but support for the portion in Turkey will have to come from somewhere else.

The difference may be critical to interpreting BP Amoco's strategy in changing its position on Baku-Ceyhan. The project would follow much of the same path as the Baku-Supsa route before turning south toward the Mediterranean. If government or multilateral investment in the Turkish portion fails to materialize, AIOC could fall back on its earlier plan to make Baku-Supsa its major route by simply expanding on its existing "early oil" line.

Turkey, Azerbaijan and Georgia are scheduled to sign an interstate agreement on Baku-Ceyhan next month in time for the OSCE meeting in Istanbul. But at least three other key agreements remain before the project is assured.

The logic of timing is also essential. Unless an agreement is reached on an export route, AIOC might have to put off its planned expansion of the offshore project, which is supposed to triple its output. Townshend said that a main export pipeline must be up and running by early 2004 in order to avoid delay.

That timetable means that construction would have to start in 2001 or 2002. Financing decisions would have to be made in the next year. If all else fails, BP Amoco's move may take the international political pressure off the company, shifting the burden to the U.S. government and the World Bank for the financing instead.