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Caspian: Setbacks In Gas Exports Could Affect Oil Pipeline

Problems for Caspian gas exports could cloud the celebrations over this week's start of the Baku-Tbilisi-Ceyhan oil-pipeline project. While Turkey is bargaining for cuts in imports and prices, developers of Azerbaijan's largest offshore gas field are struggling with higher costs and debating how fast to proceed.

Boston, 20 September 2002 (RFE/RL) -- Setbacks over gas sales and development in the Caspian Sea region could lessen some of the promised benefits from this week's dedication of the Baku-Tbilisi-Ceyhan oil pipeline.

In Baku on Wednesday, the presidents of Azerbaijan, Georgia, and Turkey marked the start of construction on the Caspian oil route to the Mediterranean, capping eight years of planning for an energy corridor through the Caucasus to the West.

Leaders who have supported the plan for the 1,760-kilometer pipeline known as BTC were unsparing in their assessments of its importance at the opening ceremony.

Azerbaijani President Heidar Aliyev called it a "dream come true" for his country, adding: "This project and its implementation can become a guarantor of peace, stability, and security in the Caucasus region. This steel pipe will bring Azerbaijan, Turkey, and Georgia even closer together."

In a letter read by U.S. Energy Secretary Spencer Abraham, President George W. Bush agreed, saying that BTC would strengthen "the sovereignty and independence of countries in the Caspian Basin."

Georgian President Eduard Shevardnadze went further, calling the $2.9 billion project "one of the most important events in the ancient histories of Azerbaijan, Turkey, and Georgia. This is Georgia's greatest achievement over the past decades since the restoration of Georgia's independence," he said on Azerbaijani television in a speech transcribed by the BBC.

Turkey's president, Ahmet Necdet Sezer, predicted that the BTC would be joined by a Caspian gas pipeline through the energy corridor. Sezer said, "These projects will contribute significantly to integrating this region into the West by boosting the economic and trade relations of the Caspian countries with the West."

But the development of gas resources may be clouded by doubt. The latest sign seems to be Turkey's cutoff of gas imports from Iran since 24 June. Turkish Energy Minister Zeki Cakan has blamed the quality of Iranian gas, but Iran's oil minister, Bijan Namdar Zanganeh, has argued that the real reason is the slumping Turkish economy.

Zanganeh has threatened to seek penalties against Turkey under terms of a 1996 take-or-pay contract that was supposed to guarantee more than $20 billion in Iranian gas sales over 25 years. The exports, which started last December, have already suffered from repeated delays. While hitches in the deal have become common, the latest dispute has led to some unusual disclosures that could also affect Caspian gas producers like Azerbaijan.

Last week, Zanganeh suggested that Turkey had halted its imports from Iran because Russia had undercut them by offering a lower price. According to the official Iranian news agency IRNA, the oil minister said, "Turkey may have decided to increase its imports from Russia because of a discount that [Moscow has] offered by selling its gas at 9 cents per cubic meter." The report added that, "This is compared with the more than 11 cents agreed between Tehran and Moscow in their contract."

The report appears confused, since the contracts are either between Turkey and Russia or Turkey and Iran, not between "Tehran and Moscow." But the message seems to be that Turkey was paying the equivalent of $110 per 1,000 cubic meters to either Russia or Iran.

Last week, Turkey's Cakan announced that he had negotiated a cut in the amount of gas that his country would take next year from Russia's new Blue Stream pipeline across the Black Sea, which is set to open next month. He also said Moscow had granted a 9 percent discount on the price of the gas it sells to Turkey. Russia is already the country's biggest supplier.

But the figures cited by Zanganeh translate into an 18 percent price cut, perhaps indicating that Iran's gas was the most expensive all along. So far, Iran seems to be resisting pressure to reopen its contract and match the Russian rates, which are roughly in line with falling gas prices in Europe. A bid to save the situation may be in the works. On Thursday, the Tehran daily "Keyhan International" reported that Turkish officials have invited a "technical delegation" from Iran to discuss the reason for the stoppage.

Although other countries might be tempted to gloat at the misfortunes of a hapless competitor, none of this is likely to be good news for producers of Caspian gas in Azerbaijan.

A series of conflicting reports suggests that all is not well with the plan to develop Azerbaijan's giant offshore Shah Deniz gas field with the companion pipeline that would run to Turkey through the Caucasus energy corridor along with the BTC.

Last week, David Woodward, the president of BP Azerbaijan, which is leading the project, said the company was "reviewing the concept of Shah Deniz" with its partners. Later in London, Woodward hastened to add that the examination was only a design review rather than a reconsideration of whether to go forward. But a decision on the project has already been pushed back from this month until late October.

Last month, Woodward said that the start date for gas deliveries to Turkey would be set back by a year to 2006 because Ankara had yet to provide purchase guarantees. This week, Ilham Aliev, vice president of the Azerbaijani state oil company SOCAR and President Aliev's son, said the problem is that BP's cost estimates for the project have jumped from $2.7 billion to $3.2 billion.

The higher costs could be discouraging at a time when Turkey is negotiating to lower gas prices and import commitments. Azerbaijan's gas may eventually find markets in Europe, but the outcome there could also depend on competition with Russia and Iran.