Caspian Sea oil a prize the U.S. wants to control

By Tom Hundley, The Chicago Tribune, Thursday 25 November 1999

A decade ago, this remote corner of the eastern Mediterranean was crowded with supertanker traffic.

These days, big ships are a rare sight at the Ceyhan Marine Terminal. More common are the herds of small antelope grazing near the facility's idle oil storage tanks. But the supertankers may soon be back.

Last week, as President Clinton looked on, the leaders of Turkey, Georgia and Azerbaijan signed an agreement to build a new 1,080-mile pipeline that could carry a million barrels of oil a day from the Caspian Sea to the Mediterranean.

The Clinton administration, which in recent months exerted considerable pressure on all parties to get the deal done in time for the Istanbul summit, is hailing the pipeline as a major foreign policy triumph.

This is not just another oil and gas deal, and this is not just another pipeline, said Energy Secretary Bill Richardson. It is a strategic framework that advances America's national security interests. It is a strategic vision for the future of the Caspian region.

Translation: Caspian oil will not have to flow through Russia or Iran to get to the oil-hungry markets of the West.

Pipelines today are a bit like railroads of a century ago. For those who build and control them, they project power and transport wealth. They open new frontiers while creating prosperity in their path.

These days the beckoning frontier is the Caspian Sea and Central Asia, where long-neglected reserves of oil and natural gas have fueled visions of empires to build and fortunes to make.

The collapse of the Soviet Union at the beginning of the decade flung open the door to the century's last great bonanza.

Oilmen from every corner of the industrialized world scrambled in and tried to grab their stake in newly independent Azerbaijan, Kazakstan and Turkmenistan.

The initial frenzy of deal-making has subsided, drilling has commenced, and over the past few months governments and oil companies have quietly downgraded their initial expectations of the region's potential wealth.

It seems the Caspian is not to be the next Saudi Arabia. It probably won't even be the next Kuwait or United Arab Emirates.

It looks more like the next North Sea, conceded a Western diplomat.

The U.S. government's early estimates that the Caspian basin might hold from 100 billion to 200 billion barrels of oil--second only to the Persian Gulf's 670 billion-- appear to have been optimistic.

Experts now say reserves are more likely in the range of 15 billion to 30 billion barrels, about the size of the North Sea deposits. These estimates are confirmed by seismic tests and drilling results.

It's still a lot of oil. While a few small prospectors have come up dry and gone home, most of the heavily invested major drillers are continuing to develop their stakes, although with somewhat less urgency.

In addition to the lowered expectations, there have been other important developments over the past 18 months. Two of the biggest players in the Caspian region--Chicago-based Amoco and British Petroleum--have merged, with BP as the dominant partner.

Even more significant is the rollercoaster ride of oil prices. The decade began with oil selling for nearly $40 a barrel. This spring the price tumbled to little more than $10--the lowest it has been since 1973, before the Arab oil embargo. Now, thanks to sharp production cuts by exporting countries, the price has climbed back toward $25.

Governments have more than a passing interest in all this. That's why a new pipeline, one that would bypass Russia and Iran, became a priority for the Clinton administration.

The administration's aim is to secure U.S. access to the Caspian basin and to extend American commercial and political interests into the Caucasus and Central Asia.

It is a tricky game, fraught with peril. Not only does it place the U.S. in direct competition with Russia, China and Iran in their back yards, it also pits U.S. geopolitical interests against the profit-making instincts of multinational oil companies.

In addition to Amoco and BP, now known as BP-Amoco, the big players are Chevron, Texaco, Pennzoil, Exxon, Mobil and a dozen others. They have put about $50 billion on the table.

The key issue facing the oil companies has been there from the beginning: How to get their oil from the landlocked Caspian to world markets.

A pipeline is the only answer, but a pipeline through whose territory? The Caspian oil fields are surrounded by some of the most politically inhospitable and unstable terrain on the planet.

To the north lies Russia; to the south, Iran and Afghanistan. To the west, standing between the oil and the lucrative markets of Europe, is the Caucasus Mountain region, where no less than five ethnic wars have raged in the last decade.

The favored pipeline route to the West, the so-called Baku-Ceyhan route, would weave between the twin powder kegs of Chechnya and Nagorno-Karabakh, skirt Armenia into Georgia and then swing south through Turkey, giving a wide berth to the area troubled by Kurdish rebels.

It would end up, 1,080 miles later, in Yumurtalik, where the oil would be loaded aboard supertankers at the Ceyhan Marine Terminal.

Ceyhan is the nearest big town to Yumurtalik. The marine terminal is a modern, deepwater port facility that until eight years ago was loading more than 70 million tons of crude oil a year.

It took awhile for official Washington to grasp the full significance of the Caspian oil, but after a slow start, the Clinton administration now appears to be fully engaged.

Thus far, the U.S. approach has been fairly predictable. Robert Ebel, an energy specialist at the Center for Strategic Studies in Washington, says the administration's pipeline policy can be summed up in three words: Anywhere but Iran.

Indeed, the most consistent theme of U.S. policy has been to exclude Iran as much as possible from the Caspian bonanza. This is frustrating to oil companies eager to get back into Iran, but the administration has remained unyielding.

Initially, the U.S. also wanted to limit Russian influence. But trying to exclude Russia from what had recently been part of the Soviet empire proved to be overreaching and unwise. The cash-strapped Russians reacted strongly and right up until last week were busy trying to derail the project.

Moreover, the oil companies did not share the administration's thinking on excluding the Russians. They wanted to export their early production through existing pipelines to outlets on the Black Sea--Novorossiysk in Russia and Supsa in Georgia.

These pipelines were in poor shape and could handle only limited amounts of oil, but once refurbished they became the shortest, quickest and cheapest route to European markets.

The Supsa line opened in April and is operating at full capacity--115,000 barrels a day. The Novorossiysk line, which passes through Chechnya, has been shut down by the fighting in the region.

Meanwhile, the administration, magnanimous in victory, has softened its stance on the Russians. They're not being cut out, insisted a senior administration official.

Historically, energy from the Caspian has gone north, only north, and then from Russia into world markets. The countries and the energy companies that are operating in the region believe that they need to have a multiple pipeline system, and that's what we support--western routes as well as the routes that are already established or are under construction in Russia, he said.

Despite the elaborate signing ceremony in Istanbul last week, the deal is far from done. The oil companies, which will decide whether to finance the pipeline, still have the final say.

The next step is a meeting of potential shippers, now scheduled for next month. If all goes according to plan, they will form the Main Export Pipelin e Co., which will conclude the financing package.

Back in the early 1990s, 11 oil companies from eight countries formed a consortium called the Azerbaijan International Oil Co. (AIOC) to prospect for Caspian oil. A year later, AIOC signed the so-called Contract of the Century, a $7.4 billion agreement with Azerbaijan to develop three major Caspian fields.

AIOC estimates the cost of the Baku-Ceyhan pipeline at $4 billion. The Turkish government, which sees the Baku-Ceyhan route as a matter of paramount national prestige, puts the cost at $2.4 billion and has guaranteed to cover cost overruns on the portion of the pipeline that will be built by its national pipeline company.

>From the outset, the key members of AIOC were BP and Amoco. They held the largest individual shares: 17 percent apiece. Amoco's share, along with that of three other American companies--Pennzoil, Unocal and McDermott--added up to a 40 percent stake in AIOC.

But the balance of power shifted dramatically in August 1998 when BP and Amoco announced their merger.

How this will affect the pipeline is a matter of intense speculation. AIOC members are not inclined to discuss their deliberations in public, but BP has long been seen within the industry as a contrarian company willing to buck the conventional wisdom.

Some industry analysts believe BP sees Asia as the likely market for its Caspian oil and favors a linkup with existing pipeline routes through Iran.

They also suggest that BP is particularly eager to get back into Iran--fixated is the word one diplomat used--and that it sees a pipeline through Iran as a good way to get its foot in the door.

Amoco's position was less clear, but under the structure of the merger, BP will apparently take the lead on decisions dealing with exploration and production, although an Amoco man will head up the company's Caspian operations.

Behind the scenes, U.S. officials were said to have put heavy pressure on the oil companies to come around to Baku-Ceyhan.

Energy Secretary Richardson told reporters last week that he had recently spoken with BP-Amoco Chairman John Brown and that BP-Amoco was now supportive of Baku-Ceyhan.

The U.S. should be careful. Using this kind of pressure to get the pipeline built sets the wrong precedent. It politicizes Caspian oil, said Ebel of the Center for Strategic Studies.

If we continue to press for Baku-Ceyhan when the oil companies say no, then we're playing politics with oil. And if we play politics, so can others.

The AIOC's reluctance to commit to Baku-Ceyhan is apparently based on three related considerations: Their estimation that the real cost of the pipeline would be closer to $4 billion, the current unsettled market for oil and concerns that it will take awhile before the Caspian fields are producing enough oil to justify the cost of a pipeline.

You don't build a $4 billion pipeline on spec, said one involved oil company executive. You don't build a pipeline until you have some oil to put in it.

When AIOC's fields reach their maximum production capacity sometime in the next three or four years, it is expected, they will be pumping 800,000 barrels a day.

Some industry experts say that is sufficient to justify the pipeline. Others say an additional 200,000 to 400,000 barrels a day from other producers will be needed.

At last week's signing ceremony, Kazakstan promised it would commit significant volumes of oil to the pipeline.

Although it didn't set a specific amount, this is seen as a big step toward making the pipeline viable.

Most oil analysts agree that if the Caspian reserves live up to expectations, Baku-Ceyhan will have to be built. They also point out that that is still a big if.