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COULD THE 'DEAL OF THE CENTURY' STILL LIVE UP TO ITS NAME?
CENTRAL ASIA - CAUCASUS ANALYST
Wednesday / October 06, 2004
By Pavel K. Baev
On 20 September 2004, Baku staged major celebrations, with Turkish
President Ahmet Necdet Sezer and Prime Minister Recep Tayyip Erdogan
and Georgian president Mikhail Saakashvily present among the guests
of honor. The cause for the festivities was the tenth anniversary
of the first contract on delivering the Azerbaijani oil to the world
market, dubbed 'the deal of the century' by the late president Heydar
Aliyev. Many expectations were frustrated during this decade but
the fast-approaching inauguration of the Baku-Tbilisi-Ceyhan (BTC)
pipeline could make good on many of the old promises.
BACKGROUND: Ten years ago, on 20 September 1994, the newly-forged
consortium of several international oil companies, called
the Azerbaijan International Operating Company (AIOC), signed the
agreement with the government of Azerbaijan on the development of three
oilfields: Azeri, Chirag, and Guneshli. It was BP that had worked
hardest and lobbied the smartest in preparation for this agreement,
but it had to cut in Amoco, Pennzoil, and Unocal from the U.S.,
Statoil from Norway and several minor operators (Exxon joined the
next year). What was more, seeking to secure a neutral or positive
attitude from Russia, Azerbaijan's State Oil Company (SOCAR) invited
Lukoil to join with a decent 10% of the total package, explaining
the presence of a representative of Russia's Ministry for Fuel and
Energy at the signing ceremony.
In those days, however, powerful bureaucrats in the Yeltsin government
were not accustomed to inform one another about their policies, so
Foreign Minister Evgeni Primakov was furious at being kept in the dark.
Three months later, the first Chechen War was unleashed and this
unfolding disaster made Moscow even more nervous and disagreeable about
Western plans for the Caspian. That started a chain of setbacks for the
AIOC: a sharp drop in oil prices, downwards re-evaluations of the oil
reserves in the Southern Caspian, disagreements about export routes,
and endless quarrels about maritime borders and even an incident
(fortunately, a single one) involving Iranian patrol crafts.
In retrospect, three key sources of troubles for the project, as well
as several other contracts signed in its wake, can be identified. The
first was the (sometimes unnecessarily rude) rejections of Iran's
proposals to channel some of the prospective oil flows towards
the Gulf through its territory. The second was the failure to give
Russia a meaningful stake in the project, thus making a partner with
a clear interest in the success. The third and most complex Pandora
box of troubles was full of local conflicts, and the oil contracts,
excitingly promising as they were, failed to make any contribution
towards their resolution. All these shortcomings are still present
but at the start of the second decade of implementation, the situation
looks significantly more promising for AIOC and its local partners. It
is not only the unstoppable rise of oil prices that improves the
overall prospects, but also the completion in the coming months, after
many delays and complications, of the strategic Baku-Tbilisi-Ceyhan
pipeline that could deliver as much as one million barrels of Caspian
oil a day to meet steadily growing world demand.
IMPLICATIONS: The intensity of geopolitical competition for Caspian
oil has visibly subsided since the late 1990s when Russia and the US
appeared to be at loggerheads over the control of prospective Caspian
pipelines. The present-day relative calm, however, might be misleading
and the absence of any Russian guests at the celebrations in Baku (as
well as the total silence about them in the Russian media) is a warning
signal. While the technicalities of the ten-year-old deal are mostly
resolved, its implementation is still threatened by three regional
risks and three external challenges. The former are the uncertainties
about President Ilham Aliyev's ability to control infighting among
interest groups in Azerbaijan's ruling elite, the desperate efforts
of President Mikhail Saakashvili to keep Georgia mobilized around his
program of reforms, and the fragility of the ten years old cease-fire
in Nagorno-Karabakh with a perfectly deadlocked peace process.
The external challenges are the disgruntlement of Iran, which seeks
for means to reduce the international pressure focused on its nuclear
program; the overstretched U.S., which is stuck in the quagmire of
Iraq and seems to have few political resources left for the Caucasus;
and the confused Russia, which seeks to expand its regional influence
but remains unable to contain the war in Chechnya. Recent Russian
efforts at re-orienting its foreign and security policies towards
the 'war on terrorism', triggered by the horrible tragedy in Beslan,
are particularly worrisome. The doctrine of military prevention has
been made an integral part of these efforts, and there is a visible
desire to show the ability to deliver on the promises made by Minister
of Defense Ivanov and Chief of General Staff Baluevsky. The Pankisi
Gorge in Georgia has long been identified as the most probable area
for a Russian 'counter-terrorist' operation, but it is entirely
possible that targets for 'surprise attacks' could be found further
south in Georgia and in Azerbaijan. The military base in Akhalkalaki,
Georgia, would then prove its value and the radar station in Qabala,
Azerbaijan, may provide a useful pretext - and if such a penetrating
'counter-terrorist preventive strike' would also prevent oil from
flowing to the West by damaging some of the BTC infrastructure,
nobody in Moscow would be greatly upset.
Such a scenario might appear entirely hypothetical, and its
repercussions could be far more serious then a post-factum exchange
of stern diplomatic notes. Every balanced assessment of immediate
consequences and further implications would warn against reckless use
of military instruments in the Caucasus, but the Russian leadership has
been departing further and further away from its trademark pragmatism
and increasingly shows the predisposition to inadequate responses in
crisis situations.
CONCLUSIONS: The renewed enthusiasm around the decade-old 'deal of
the century' is fueled by record-high oil prices and pinned on the
forthcoming unveiling of the high-capacity pipeline. In unstable
areas like the Caucasus, however, huge profits tend to attract
big trouble. The recent cancellation of NATO Partnership for Peace
exercises in Azerbaijan was certainly not an isolated diplomatic
incident; the lack of real partnership is certainly an open secret
but the absence of real peace needs to be addressed urgently. The
list of things that might go wrong with delivering the Caspian oil
to the world markets is excessively long, from implosion of regimes
in the South Caucasus to Russia's aggressive move in reasserting its
dominance. The deal would have deserved the pretentious name if it
was used for promoting stability in the region. It may not be too
late to give this emphasis to the oil policies, but the currently
prevalent benign neglect is not the way to proceed.
AUTHOR'S BIO: Dr. Pavel K. Baev is a Senior Researcher at the
International Peace Research Institute, Oslo (PRIO).
The CENTRAL ASIA - CAUCASUS ANALYST is a publicaton of the Central
Asia-Caucasus Institute at the Nitze School for Advanced International
Studies, at Johns Hopkins University, in Washington, DC.
CENTRAL ASIA - CAUCASUS ANALYST
Wednesday / October 06, 2004
By Pavel K. Baev
On 20 September 2004, Baku staged major celebrations, with Turkish
President Ahmet Necdet Sezer and Prime Minister Recep Tayyip Erdogan
and Georgian president Mikhail Saakashvily present among the guests
of honor. The cause for the festivities was the tenth anniversary
of the first contract on delivering the Azerbaijani oil to the world
market, dubbed 'the deal of the century' by the late president Heydar
Aliyev. Many expectations were frustrated during this decade but
the fast-approaching inauguration of the Baku-Tbilisi-Ceyhan (BTC)
pipeline could make good on many of the old promises.
BACKGROUND: Ten years ago, on 20 September 1994, the newly-forged
consortium of several international oil companies, called
the Azerbaijan International Operating Company (AIOC), signed the
agreement with the government of Azerbaijan on the development of three
oilfields: Azeri, Chirag, and Guneshli. It was BP that had worked
hardest and lobbied the smartest in preparation for this agreement,
but it had to cut in Amoco, Pennzoil, and Unocal from the U.S.,
Statoil from Norway and several minor operators (Exxon joined the
next year). What was more, seeking to secure a neutral or positive
attitude from Russia, Azerbaijan's State Oil Company (SOCAR) invited
Lukoil to join with a decent 10% of the total package, explaining
the presence of a representative of Russia's Ministry for Fuel and
Energy at the signing ceremony.
In those days, however, powerful bureaucrats in the Yeltsin government
were not accustomed to inform one another about their policies, so
Foreign Minister Evgeni Primakov was furious at being kept in the dark.
Three months later, the first Chechen War was unleashed and this
unfolding disaster made Moscow even more nervous and disagreeable about
Western plans for the Caspian. That started a chain of setbacks for the
AIOC: a sharp drop in oil prices, downwards re-evaluations of the oil
reserves in the Southern Caspian, disagreements about export routes,
and endless quarrels about maritime borders and even an incident
(fortunately, a single one) involving Iranian patrol crafts.
In retrospect, three key sources of troubles for the project, as well
as several other contracts signed in its wake, can be identified. The
first was the (sometimes unnecessarily rude) rejections of Iran's
proposals to channel some of the prospective oil flows towards
the Gulf through its territory. The second was the failure to give
Russia a meaningful stake in the project, thus making a partner with
a clear interest in the success. The third and most complex Pandora
box of troubles was full of local conflicts, and the oil contracts,
excitingly promising as they were, failed to make any contribution
towards their resolution. All these shortcomings are still present
but at the start of the second decade of implementation, the situation
looks significantly more promising for AIOC and its local partners. It
is not only the unstoppable rise of oil prices that improves the
overall prospects, but also the completion in the coming months, after
many delays and complications, of the strategic Baku-Tbilisi-Ceyhan
pipeline that could deliver as much as one million barrels of Caspian
oil a day to meet steadily growing world demand.
IMPLICATIONS: The intensity of geopolitical competition for Caspian
oil has visibly subsided since the late 1990s when Russia and the US
appeared to be at loggerheads over the control of prospective Caspian
pipelines. The present-day relative calm, however, might be misleading
and the absence of any Russian guests at the celebrations in Baku (as
well as the total silence about them in the Russian media) is a warning
signal. While the technicalities of the ten-year-old deal are mostly
resolved, its implementation is still threatened by three regional
risks and three external challenges. The former are the uncertainties
about President Ilham Aliyev's ability to control infighting among
interest groups in Azerbaijan's ruling elite, the desperate efforts
of President Mikhail Saakashvili to keep Georgia mobilized around his
program of reforms, and the fragility of the ten years old cease-fire
in Nagorno-Karabakh with a perfectly deadlocked peace process.
The external challenges are the disgruntlement of Iran, which seeks
for means to reduce the international pressure focused on its nuclear
program; the overstretched U.S., which is stuck in the quagmire of
Iraq and seems to have few political resources left for the Caucasus;
and the confused Russia, which seeks to expand its regional influence
but remains unable to contain the war in Chechnya. Recent Russian
efforts at re-orienting its foreign and security policies towards
the 'war on terrorism', triggered by the horrible tragedy in Beslan,
are particularly worrisome. The doctrine of military prevention has
been made an integral part of these efforts, and there is a visible
desire to show the ability to deliver on the promises made by Minister
of Defense Ivanov and Chief of General Staff Baluevsky. The Pankisi
Gorge in Georgia has long been identified as the most probable area
for a Russian 'counter-terrorist' operation, but it is entirely
possible that targets for 'surprise attacks' could be found further
south in Georgia and in Azerbaijan. The military base in Akhalkalaki,
Georgia, would then prove its value and the radar station in Qabala,
Azerbaijan, may provide a useful pretext - and if such a penetrating
'counter-terrorist preventive strike' would also prevent oil from
flowing to the West by damaging some of the BTC infrastructure,
nobody in Moscow would be greatly upset.
Such a scenario might appear entirely hypothetical, and its
repercussions could be far more serious then a post-factum exchange
of stern diplomatic notes. Every balanced assessment of immediate
consequences and further implications would warn against reckless use
of military instruments in the Caucasus, but the Russian leadership has
been departing further and further away from its trademark pragmatism
and increasingly shows the predisposition to inadequate responses in
crisis situations.
CONCLUSIONS: The renewed enthusiasm around the decade-old 'deal of
the century' is fueled by record-high oil prices and pinned on the
forthcoming unveiling of the high-capacity pipeline. In unstable
areas like the Caucasus, however, huge profits tend to attract
big trouble. The recent cancellation of NATO Partnership for Peace
exercises in Azerbaijan was certainly not an isolated diplomatic
incident; the lack of real partnership is certainly an open secret
but the absence of real peace needs to be addressed urgently. The
list of things that might go wrong with delivering the Caspian oil
to the world markets is excessively long, from implosion of regimes
in the South Caucasus to Russia's aggressive move in reasserting its
dominance. The deal would have deserved the pretentious name if it
was used for promoting stability in the region. It may not be too
late to give this emphasis to the oil policies, but the currently
prevalent benign neglect is not the way to proceed.
AUTHOR'S BIO: Dr. Pavel K. Baev is a Senior Researcher at the
International Peace Research Institute, Oslo (PRIO).
The CENTRAL ASIA - CAUCASUS ANALYST is a publicaton of the Central
Asia-Caucasus Institute at the Nitze School for Advanced International
Studies, at Johns Hopkins University, in Washington, DC.