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Azerbaijan: Progress Seen On Baku-Ceyhan Oil Pipeline

A Caspian Sea oil pipeline from Azerbaijan has made progress toward a final commitment this month with a pledge of financing from the European Bank for Reconstruction and Development. But questions remain for a gas line along the same route as officials voice doubts about the Turkish market.

Boston, 5 June 2002 (RFE/RL) -- A Caspian Sea pipeline picked up major support last week as the European Bank for Reconstruction and Development announced plans to underwrite 10 percent of the project.

The EBRD credit for the Baku-Ceyhan pipeline comes as sponsors prepare to make final commitments to the U.S.-backed project later this month. Thomas Moser, head of the EBRD's resident office in Azerbaijan, said, "We want to finance the Baku-Ceyhan project and are ready to fund $300 million before the end of 2002," Reuters reported.

Multilateral lenders like the International Finance Corporation of the World Bank and the EBRD are likely to provide 70 percent of the funding for the $2 billion project, along with export credit agencies and commercial banks, according to Dow Jones Newswires. The remainder will come from project sponsors, led by Britain's BP oil company.

Moser said bank lending could reach $2 billion for the 1,730-kilometer oil pipeline and a companion gas project from Azerbaijan's offshore Shah Deniz field. After eight years of planning, Azerbaijan's goal of exporting through Georgia to Turkey's Mediterranean port of Ceyhan appears to be headed toward contracting next month and construction next March.

While an EBRD role has long been expected, Moser's statement is seen as a sign that the pieces of Baku-Ceyhan are falling into place, despite disappointments over sponsorship deals that seem to have fallen through.

On 31 May, a Baku-Ceyhan official indicated that talks had broken off with U.S.-based ChevronTexaco, which operates the giant Tengiz oilfield in Kazakhstan. The project's general manager, Michael Townshend, said, "We have had a number of discussions with Chevron. We were quite close to reaching an agreement with them." But he told AFX News that there had been no talks in over a month.

The apparent failure of negotiations may frustrate the project's long bid to draw oil from Kazakhstan and ease concerns that it will not fill the pipeline's peak capacity of 1 million barrels per day. BP officials have insisted that there will be no such problems and that Azerbaijan's oil alone will be enough.

Last month, the BP-led consortium for Azerbaijan's main oilfields raised its estimate of reserves from 4.6 billion barrels to 5.3 billion, supporting its case. BP officials showed confidence in the volume on 31 May when they announced a study to raise the capacity of a temporary line to Georgia's Black Sea port of Supsa while waiting for Baku-Ceyhan to open by 2005.

Townshend said talks with potential investors were still going on before construction, but it was unclear whether a last-minute deal is still possible with Russia's LUKoil, which has so far failed to win approval from the government in Moscow.

A more critical question may be whether the gas pipeline from the Shah Deniz field will proceed. Doubts have been raised by Turkey's recent drop in demand forecasts and its failure to take delivery of gas from Russia and Iran under take-or-pay contracts.

Ilham Aliev, vice president of the Azerbaijani state oil company SOCAR, reacted sharply last week after BP's chief executive of exploration and production, Dick Olver, voiced concern about Turkey's ability to buy Shah Deniz gas.

Aliev, who is the son of President Heidar Aliev, suggested that Azerbaijan might use the gas itself, according to Caucasus Press. He said: "We are now buying 4 billion cubic meters of gas from Russia. BP will be extracting the amount only in 2005-2006." Aliyev also said the gas could be sold in the Balkans or Italy.

The problem is that Azerbaijan is hardly likely to pay the same price as Turkey, reducing the investors' return. Russia and Iran are also trying to sell their gas on to European markets because Turkey's forecasts have not panned out.

Last month, the industry newsletter Nefte Compass reported that BP and other Shah Deniz investors are scheduled to decide in the third quarter of this year whether to build the $2.6 billion pipeline from the gas field.

On 3 June, the U.S. adviser on the Caspian, Steven Mann, said, "I have very, very strong confidence that the Shah Deniz pipeline will proceed as my government hopes and expects that it will," Reuters reported. But he added more cautiously, "It's an issue that deserves some attention, and I do have confidence that the (Turkish) government will manage this issue effectively."

It is unclear how Baku-Ceyhan's economics will be affected if the gas line is not built. Officials have argued that the two projects could share some costs for efficiency. But several years ago, some industry officials also argued that there had never been a case anywhere in the world where major oil and gas lines had been built at the same time side-by- side.

Some of those same officials are now promoting the projects. They will now have to decide which of their arguments was right.