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Caucasus: Will Russia's LUKoil Join The Baku-Ceyhan Pipeline Project?

While Russia's LUKoil prepares to take a stake in the Baku-Ceyhan pipeline in March, the Russian government has yet to give its public approval for the deal. Moscow may have tacitly allowed negotiations to go ahead, but some officials are making it clear that they still oppose the move.

Boston, 27 February 2002 (RFE/RL) -- Even with a deal in the works, Russia continues to send mixed signals about whether it will join in sponsoring the Baku-Ceyhan pipeline, raising questions about Moscow's strategy for the U.S.-backed project.

Russian support for the pipeline from Azerbaijan's Caspian oil fields through Georgia to Turkey's Mediterranean port of Ceyhan would mark a major turning point in cooperation between the two powers.

So far, there has been no official word from the Russian government about whether it will approve participation of Russian oil companies in the $2.75 billion project, which is due to start construction in June.

As the weeks pass and the deadline approaches, Moscow's silence may soon be taken for acquiescence that Russian companies are free to pursue their interests in a plan that it once fiercely opposed.

Talks with at least one Russian company appear to be in final stages. The president of Azerbaijan's state oil company SOCAR, Natik Aliev, said that LUKoil is likely to sign an agreement for a share in the pipeline in March.

The Interfax news agency quoted Aliyev as saying, "We are satisfied with the pace of negotiations with Lukoil for the company to join the sponsorship group for the project to build the export pipeline."

On 25 February, the head of LUKoil operations in Azerbaijan, Fikrat Aliev, confirmed that Russia's largest oil company plans to buy a share of 7.5-8 percent of the project from SOCAR, the Turan news agency said. LUKoil's president, Vagit Alekperov, spoke in similar terms in January.

But the latest statement from a Russian government official still leaves room for uncertainty. Speaking recently in Moscow, Russia's Caspian envoy, Deputy Foreign Minister Viktor Kalyuzhny, said that he "personally, as a Russian citizen, is against the construction of this pipeline," according to Interfax.

On the one hand, the wording might mean that although the government has given its tacit assent, Kalyuzhny continues to oppose the pipeline as a private matter. It might also mean that the decision has yet to be made, and Kalyuzhny is arguing against it in the public interest.

Although the official position is unclear, Kalyuzhny seemed to leave no doubt where he stands on the question of any non-Russian development in the region. Interfax quoted him as saying, "The Caspian belongs to the Russian market."

Such sentiments were widespread when Azerbaijan announced its first offshore development with foreign partners in 1994, but they have slowly faded with the recognition that CIS nations have the right to pursue their own course.

Similarly, LUKoil has been careful to stress in the past that it would only join the Baku-Ceyhan project with approval from the government, which owns 15.5 percent of its shares. But in recent weeks, that cautionary note has also gradually vanished from reports on the talks.

Even so, Kalyuzhny's comment on Russian control of the Caspian may be a sign of the fallout that President Vladimir Putin will face if he formally announces support for Baku-Ceyhan. The political resistance may account for the long lag in acknowledging that negotiations are well under way.

More curious is the resistance to the project on economic grounds. Since last year, Kalyuzhny and other Russian officials have argued that Baku-Ceyhan is not "economically viable," instead of attacking it for political reasons.

The concerns include questions about whether the pipeline will attract enough oil to fill its capacity of 1 million barrels per day. Some of the arguments are self-fulfilling, in light of the fact that Russia can influence transport decisions, both with its own oil companies and those of neighboring Kazakhstan.

In December, LUKoil said a new study by Britain's BP oil company had found that the pipeline's profitability would be 24-24.5 percent, a margin that might be more than enough to silence the official critics. BP is the operator of the project and leader of the sponsorship group. Yet, the questions have not only come from officials.

Two weeks ago, the chief executive of Russia's second-biggest oil company, Yukos, sent his own mixed message on the pipeline project. Mikhail Khodorkovskii told the Reuters news agency: "Personally, I am for the Baku-Ceyhan pipeline. In recent times, the Russian government has looked somewhat more favorably on this project." Yukos has reportedly been considering a 12.5 percent stake in the project.

But Khodorkovskii added, "I am not convinced of the economic soundness of the Baku-Ceyhan pipeline." In other words, unlike Kalyuzhny, Khodorkovskii favors the route personally and politically. But he has the same doubts about the economics. This appears to be where logic breaks down.

Despite the repeated questioning about economic viability, there is a more basic question that has yet to be addressed. Why would BP invest in a project if it was not economically viable? For that matter, why would LUKoil, or Yukos, or any oil company?

Khodorkovskii's public doubt about the economics could be nothing more than a bargaining tactic, or it may be a way to please officials like Kalyuzhny. But either way, the arguments about politics and economics will have to be settled in the next three months.