Al-Ahram Weekly   Al-Ahram Weekly
2 - 8 December 1999
Issue No. 458
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Scramble for Caspian oil

By Gareth Jenkins

On 24 November, the Russian gas company Gazprom signed a $1.7 billion contract with firms from Italy, Japan and France to build a 1,200 km pipeline under the Black Sea from the Russian port of Tuapse to the Turkish coastal city of Samsun. Three days later on 27 November, Turkey and Gazprom signed a protocol on tax exemptions for the gas, removing the last obstacle to the construction of the pipeline. Once completed, the pipeline, called Blue Stream, is expected to carry 16 billion cubic metres of gas per year to Turkey.

The signing of the Blue Stream agreements came just a week after two other pipeline agreements appeared to have set the seal on US efforts to ensure Western access to Caspian and Central Asian oil and natural gas by bypassing Russia and Iran.

On 18 November, at the Organisation for Security and Cooperation in Europe (OSCE) summit in Istanbul, the presidents of Turkey, Azerbaijan and Georgia signed an accord to build a 1,730 km long pipeline to carry oil from the Azeri capital Baku to Ceyhan on the Turkish Mediterranean coast. The pipeline is due to be completed by 2004 at an estimated cost of $2.4 billion. Under a protocol attached to the agreement, Kazakhstan also agreed to pump some of its oil through the pipeline.

At the same time Turkey, Azerbaijan, Georgia and Turkmenistan signed an agreement to build a 2,000 km pipeline from Turkmenistan under the Caspian Sea and then overland to Turkey. The pipeline is expected to carry 16 billion cubic metres of gas annually by late 2002, later rising to 30 billion cubic metres, 14 billion cubic metres of which will be sold to European markets.

Sandy Berger, President Clinton's national security adviser, claimed that the agreements were not directed against Russia in any way, but US Energy Secretary Bill Richardson was less reticent: "This is not just another oil and gas deal," he enthused. "It is a strategic framework that advances America's national security interests."

Moscow was unimpressed. Russian Foreign Minister Igor Ivanov bluntly declared that the agreements were not in Russia's interests. But the game is far from over. It is still uncertain whether any of the pipelines envisaged in the recent flurry of agreements will actually be built.

Privately, Western oil companies involved in exploration in the Caspian admit that they may have overestimated its oil reserves. Proven oil reserves for the entire Caspian Sea are estimated at between 16 and 32 billion barrels. This compares with proven reserves of 22 billion barrels in the US and 17 billion barrels in the North Sea. But 32 billion barrels is still only equivalent to approximately five per cent of the total proven oil reserves in the Middle East. Even allowing for new discoveries, the Caspian is unlikely to rival the Middle East, which itself is believed to have considerable undiscovered oil reserves.

Nonetheless, there is still a sufficient quantity of oil in the Caspian to make it a potentially vital source of hard currency for both Azerbaijan and Kazakhstan. The question is how these countries and the Western oil companies currently operating in the Caspian will transport the oil to the international market. At present, the only pipelines in the region date back to Soviet times and transit Russia. Moscow has proposed an expansion of the existing pipeline from the Caspian to the Black Sea port of Novorosiisk. Oil is already being shipped from Novorosiisk across the Black Sea and through the Bosphorus to the Mediterranean. But the Bosphorus can only handle relatively small quantities of oil; tentative plans to build pipelines from the Bulgarian or Romanian coasts to the Mediterranean or Western Europe have failed to attract international support.

Perhaps more critically, the pipeline from the Caspian to Novorosiisk currently runs through Chechnya. Russia has suggested building a diversion through Dagestan. But, as Chechen Islamists demonstrated earlier this year, Dagestan is also vulnerable. In this sense, Russia's current military offensive to reassert Moscow's control over Chechnya could be counterproductive. Even if the Russian army succeeds in capturing the Chechen capital of Grozny, the brutality of Moscow's military campaign has almost certainly ensured that guerrilla warfare will continue for years -- and pipelines are easy targets.

"There will be a long partisan war. We are prepared for this," warned Shamil Basayev, Chechnya's most prominent Islamist warlord.

The threat of guerrilla attacks has also cast a shadow over the proposed Baku-Ceyhan pipeline. Despite the truce declared by imprisoned Kurdistan Workers Party (PKK) leader Abdullah Ocalan, many PKK militants have vowed to continue fighting in the mountains of southeast Turkey. During its 14-year campaign, the PKK has frequently targeted the oil pipeline running from Iraq to Iskenderun on the Turkish Mediterranean coast.

Even without the danger of terrorist attacks, several of the Western oil companies active in the Caspian are sceptical about whether the Baku-Ceyhan pipeline is economically viable. They point out that the pipeline would have to carry one million barrels of oil a day, equivalent to 50 million tons a year, just to break even. "Oil prices have risen recently, but we have to look five or even 10 years ahead and we are not convinced that either the reserves in the Caspian or the price of oil at the time will necessarily justify the expense of the pipeline," said an official from a Western oil company.

Some analysts have also suggested that the Baku-Ceyhan pipeline may be sending the oil in the wrong direction. A US Department of Energy report forecasts that oil demand in Europe will grow by around 1 million barrels per day over the next 10-15 years, compared with an estimated increase in demand in Asia of over 10 million barrels per day.

Privately, oil company officials admit that the most logical route for a pipeline would be through Iran. Teheran has already signed oil swap agreements with Kazakhstan, importing limited quantities of Kazak oil in northern Iran in return for the proceeds from the same quantity of Iranian oil exported through the Gulf. Iran has also offered to build pipelines to carry Caspian and Central Asian oil across Iran to the Gulf, where it could be shipped to international markets. But the idea was abruptly dismissed by the US, which has passed legislation not only forbidding US companies to conduct business with Iran but also imposing severe sanctions on non-US companies that invest more than $20 million in the Iranian oil or natural gas sectors.

However, Washington's enthusiasm for isolating Iran is not shared by Turkey, which, despite ideological differences, remains keen to boost economic ties with Teheran. Ankara has already signed an agreement to import Iranian natural gas, although it has yet to build a pipeline to the Iranian border. Iran also lies astride the main land transportation routes for Turkish trade with the republics of Central Asia. Ankara has a lot to lose by antagonising Teheran.

Similarly, while it has vigorously championed the Baku-Ceyhan oil pipeline -- not least because it will bring Turkey annual revenue of nearly $200 million in transit fees -- Ankara has quietly defied Washington over Russian natural gas.

Turkey already buys around 9 billion cubic metres of Russian natural gas each year, most of it to heat cities such as Ankara and Istanbul. Prime Minister Bulent Ecevit was originally due to sign the Blue Stream protocol agreement during an official visit to Moscow in early November. Privately, Turkish officials admit that they delayed signing the agreement until last Saturday for fear of antagonising the US in the run up to the 18-19 November OSCE summit in Istanbul.

The decision has irritated Turkmenistan. Turkmen President Saparmurad Niyazov complained that the price of 1,000 cubic meters of Turkmen gas transported through the trans-Caspian pipeline would cost $70, while Russian gas from the Blue Stream would cost $114. "Turkmenistan wants to have its own access to Turkey and Europe and the brotherly Turkish people must help us at this critical moment," Niyazov said.

The US administration has yet to comment on the signing of the Blue Stream protocol. Turkey insists that its demand for natural gas will be sufficient for both Blue Stream and the trans-Caspian pipeline. But many analysts are not so sure.

"Practical work on the Blue Stream pipeline is already quite advanced, whereas the trans-Caspian agreement signed at the OSCE summit is still only on paper," commented one energy analyst. "If it comes to a choice, Blue Stream will win."

There are also increasing indications that the US policy of trying to exclude both Russia and Iran from the oil and gas pipelines may push them closer together. On 28 November, Russian Foreign Minister Igor Ivanov arrived in Teheran for a one-day visit described by the Iranian Foreign Ministry as a further sign of warmer relations between the two countries.

Ivanov's agenda for his meeting with his Iranian counterpart Kamal Kharazi was headed by the joint construction of the Bushehr nuclear plant in southern Iran, which has already been bitterly criticised by the US, and issues related to the Caspian Sea.

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