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  • BP fighting West's energy cold war in the Caucasus

    Emirates Business 24/7, United Arab Emirates
    Aug 23 2008



    BP fighting West's energy cold war in the Caucasus

    By Frank Kane on Saturday, August 23, 2008


    If all goes according to BP's plan, crude will soon flow again through
    the Baku-Tiblisi-Ceyhan (BTC) pipeline, one of the most important
    geostrategic energy routes in the world. But it is unlikely that will
    be an end to the concerns that have dogged the British oil giant in
    the Caucasus, where its long-running confrontation with Russia has
    assumed all the dimensions of an energy cold war.

    Last week, at the Azerbaijani oil terminal of Sangachal, 45km along
    the Caspian coast from the capital, Baku, oil was flowing, but in much
    reduced quantity, and ` from BP's point of view ` in the wrong
    direction. A suspected terrorist attack on the BTC in eastern Turkey,
    and Russia's military action against Georgia, meant that most of the
    limited amount of crude that was being shipped was going exactly where
    BP did not want it to go ` through the northern pipeline (NREP) that
    crosses the Azeri-Russian border before ending up at the Black Sea
    port of Novorossiysk.

    That meant another victory in the Caucasus for the Russians, and a
    defeat for the West in the modern equivalent of the nineteenth century
    "Great Game" ` the struggle for control of the potentially enormous
    reserves of Azerbaijan, which dominates oil-production in the
    Caspian. The stakes are high. BP ` backed by European countries
    fearful of Russian control of their energy supplies ` wants to
    safeguard oil and gas flows from the Caspian region, and keep it out
    of Russian hands. Azerbaijan, the former Soviet republic, which on
    independence in 1991 found itself sitting on some of the most
    significant but strategically problematic oil reserves on the planet,
    wants to use the revenue for much-needed modernisation and economic
    development.

    Azerbaijan has ambitions to join the club of sovereign wealth fund
    (SWF) countries like the UAE and Singapore, but finds itself in a
    delicate situation ` caught between the energy imperialism of its
    former Soviet "comrades" and the ambitions of Iran to the south. It
    will require delicate diplomatic choreography by the Azeris, who are
    acutely mindful of the fate of their neighbour, Georgia, invaded and
    occupied by Russian troops.

    Oil has been a blessing , and a curse, to the region for
    millennia. Caspian oil was exported to central Asian and Europe
    throughout modern history and according to some analysts, by 1900
    Azerbaijan accounted for more than half of the world's trade in crude
    oil.

    Nazi Germany was aware of the potential difference Caspian oil would
    make to its war machine, and Hitler's armies were on their way to Baku
    before they were halted at Stalingrad in 1942. The Soviets plundered
    the region's oil reserves using obsolete technology and with no
    thought for the environmental consequences, leaving the Baku region
    with an ecological problem the Azeri government is still trying to
    deal with. Great swathes of land outside the city are heavily
    polluted, with ancient "nodding donkey" platforms doting the landscape
    of abandoned facilities.

    After independence, the Azeri government opened up the country to
    foreign investment, and Western oil companies brought in modern
    technology that could exploit huge reserves untouched by the Russians,
    out in the open sea. It is from this era that BP's involvement began,
    principally with the Azer-Chirag-Gunashli field in the Caspian, which
    provides most of the crude that now comes ashore at
    Sangachal. Azerbaijan is in the top 20 countries ranked according to
    oil reserves.

    BP was aware, however, that it faced a massive logistical problem in
    shipping this crude out of the region. Already in 2002 there were
    concerns that Russia had a commanding grip on supplies in the region,
    despite the pipeline that went west from Baku to the Georgian Black
    Sea port of Suspa. (Supposedly safe from Russian interference, the
    reliability of Georgia as a supply route was exposed a couple of weeks
    ago as BP watched Russian warplanes dropping bombs near the Suspa
    pipeline. The Suspa route (WREP) was suspended on August 12.) BP, as
    lead and managing member of a consortium that included the Azeri
    government-owned oil company Socar, as well as some of the biggest
    corporate names in the international oil industry, saw the solution in
    a pipeline that avoided the Black Sea and went straight for the
    Turkish Mediterranean port of Ceyhan, and the BTC concept was born in
    2002. Four years later, at a cost of $4 billion (Dh14.7bn) to BP, the
    first crude flowed through the new 1,750km "East-West Pipeline", as BP
    proudly presented it.

    The pipeline's route was determined as much by political and strategic
    considerations as environmental concerns. It skirted Armenia ` which
    had fought a three-year war with Azerbaijan in the early 1990s ` and
    had to be buried beneath towns and culturally-sensitive areas,
    especially in eastern Turkey.

    When on August 5 a fire broke out at one of the pumping stations along
    this section of the pipeline, it was suspected that separatist Kurds
    were responsible, and the line was closed immediately for
    repair. However, it seems almost certain it would have halted a week
    later anyway, as Russian tanks came within striking distance of the
    BTC and planes dropped bombs dangerously nearby. The fragility of BP's
    grand strategy to bypass Russian influence in the region appeared to
    have been exposed.

    BP officials in the company's Baku office last week could give no firm
    date for the resumption of supplies, but more recent reports from the
    United States said BP hoped to resume shipping from the terminal at
    Ceyhan next week, once the Turkish partner in the consortium had
    finished testing the repaired facilities and assuming there were "no
    further problems". Presumably these include possible fractures to the
    still-fragile ceasefire between Russia and Georgia. It cannot come a
    day too soon for Azerbaijan.

    The 850,000 barrels per day that pass through the pipeline represent
    the country's biggest source of revenue, worth more than $1bn a day at
    the current (relatively low) price of $119 per barrel. The World Bank
    estimates that Azerbaijan could amass a sovereign wealth fund of about
    $250bn out of the revenue from BTC, propelling the country into the
    SWF big league. The state investment company Sofaz is estimated to
    have $3.34bn in reserves from energy revenue.

    For a country still struggling with the legacy of Soviet neglect, this
    would represent a dramatic change in fortunes. Azerbaijan has topped
    the world league tables for growth in gross domestic product for the
    past couple of years, with 20 per cent-plus rates of growth, making
    the booming economies of China and India seem sluggish in
    comparison. However, all of this is due to oil revenue, and Azerbaijan
    faces serious challenges if it is to harness this growth for long-term
    development.

    A recent report by ratings agency Moody's highlighted the "vibrant
    oil-driven growth" and the healthy state of public finances, but also
    pointed to high inflation (perhaps more than 20 per cent), a
    relatively undiversified economy, a rudimentary banking system,
    untested socio-economic systems and few managerial cadres. It also
    pointed to the culture of corruption endemic in the country.

    The Azeri government led by President Ilham Aliyev "faces the
    difficulties of sheltering the economy from its current over-exposure
    to potential external shocks, whether they come in the form of lower
    energy prices, currency fluctuations, or even geopolitical problems,"
    says Moody's. In particular, Azerbaijan will have to cope with "Dutch
    disease", the phenomenon that has blighted energy-dependent economies,
    forcing up inflation and straining investment in infrastructure and
    diversification. Deeper economic ties with the Gulf could also help
    Azerbaijan face these challenges, but ` after a flurry of trade
    missions and talks about free-trade agreements with the UAE a couple
    of years ago ` commercial opportunities with the region seem limited
    to high-profile advertising for Dubai property in the Azeri
    media. Azerbaijan seems to be looking firmly west, rather than
    south. For BP, there is much at risk in the Caspian. The company's
    long-running confrontation with its Russian partners in TNK is coming
    to some kind of denouement, with the decision by the head of BP's
    Russian business, Robert Dudley, to quit Moscow. Despite BP's stated
    commitment to carry on in Russia, there appears to be little hope of
    normal business being resumed between BP and Russia in the near
    future, if ever.

    http://www.business24-7.ae/articles/2008/8/ pages/08232008_bea14fe935c544258cb5bdbd305d2d76.as px
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