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Caucasus: Georgia Looks For Key Role In Regional Energy

After three months of delay on the Baku-Ceyhan pipeline for Caspian Sea oil, the focus has fallen on Georgia's demands. The country hopes to play a key role both for the Caspian and its neighbors on the Black Sea. RFE/RL correspondent Michael Lelyveld takes a look at the latest developments.

Washington, 21 February 2000 (RFE/RL) -- Oil industry officials have grown impatient with Georgian demands that have blocked a major Caspian Sea pipeline. But some reports suggest that the sticking points may be minor compared with the project's overall costs.

Progress on the Baku-Ceyhan oil line between Azerbaijan and Turkey has been stalled for three months due to Georgia's conditions for the route that crosses its territory.

Although participating nations signed a series of pacts at the Istanbul security summit on November 18, they were unable to complete a host government agreement with Georgia in time. Tbilisi has since pressed a series of demands, prompting a BP Amoco official this week to call the lack of progress "frustrating."

Officials of Georgia, Turkey, and Azerbaijan have been meeting in Baku over the past week to resolve the key remaining difference over transit fees. Georgia has reportedly sought 20 cents per barrel for the oil that will transit the $2.4 billion line.

BP Amoco said this week that other demands over security, environmental damage and compensation for land have already been settled. Strictly by the numbers, the fee would bring $73 million a year to Georgia, when deliveries reach a peak of 1 million barrels per day. It is a seemingly small sum for a project that may yield more than $100 billion in total revenues for the Azerbaijan International Operating Company, which is developing Caspian offshore fields.

The difference could actually be even smaller. Georgia is already said to be earning 17 cents per barrel for the "early oil" exported through its Black Sea port of Supsa. The three-cent increase for Baku-Ceyhan translates to only $11 million a year, an amount that could soon be dwarfed by the cost of delay.

Negotiations appear to be strained because the partners in Baku-Ceyhan have already negotiated an overall transit fee of $2.58 per barrel, with $1.59 reserved for Turkey. As a result, Georgia's demand may have the effect of pitting it against Azerbaijan, which might have to take a smaller share.

But the real key to the problem may be Georgia's plan to build a new refinery at Supsa that could make it a top exporter of fuels to neighboring nations. After months of focus on the interests of Turkey and Azerbaijan, the importance of Georgia is now becoming clearer as an energy gateway between the Caspian and the countries of the Black Sea.

Last week, officials of the Georgian International Oil Corporation said construction of the $300-million refinery at Supsa would only begin after final agreements are reached on Baku-Ceyhan, the Caspian Times reported.

Georgia's demands are said to include a share of the crude that would flow over the line. The oil would be processed at Supsa and Georgia's existing refinery at Batumi. Georgia's ambition may be seen in the plan to eventually raise the capacity of the new refinery to 240,000 barrels per day. Sources for supply include not only Azerbaijan but also Kazakhstan. Potential markets for fuel are northern Turkey, Ukraine, Moldova, Bulgaria, and Romania.

Refining and exports offer Georgia a chance to multiply its transit earnings many times over with higher-value products. In addition, the plan may not necessarily depend on completion of Baku-Ceyhan.

Georgia is already host to the only working pipeline route from the Caspian with its "early oil" line to Supsa. The country also moves oil from Kazakhstan to the Black Sea by rail. Those routes will likely be expanded for far greater volumes from the Caspian if Baku-Ceyhan is not built. Either way, Georgia wins.

Georgia's commanding position may account for its persistence in negotiating its demands. It may feel heavy pressure from Russia, which wants Baku's oil to flow to Novorossiysk. But here, Georgia may also gain the upper hand.

Some analysts believe that Russia will need Georgia to complete its plans for delivering more gas to Turkey if its ambitious scheme for laying a pipeline under the Black Sea cannot be realized. In fact, plans have already been reported for a new Russian gas line through Georgia to Turkey. Such a route would give Tbilisi even greater leverage as the energy crossroads of the Caucasus.

In the scheme of things, Georgia's demands on Baku-Ceyhan may appear frustrating and small. But its own plans may be larger and could prove significant.