October 10, 2008

Story Of Baku-Ceyhan Pipeline Filled With Intrigue

By Share, Jeff

Executive Profile As the world anxiously watches Russian bombs rain their death and destruction over neighboring Georgia, one bears in mind that energy pipelines are one of the key issues that is causing increased tensions between Russia, Georgia and several of its other Caspian neighbors in recent years.

As of this writing (Aug. 13), Russia has reportedly stopped its assault short of destroying its pro-West neighbor and Georgia's vital Baku-Ceyhan crude oil pipeline. That historic thousand-mile $3.8 billion pipeline came on line in 2006, following 15 years of often volatile planning and negotiating that would permanently change global oil strategy.

That Caspian initiative, solidly endorsed by the Clinton administration, sought to wean that region from the clutches of Russia and Iran toward the West. That it succeeded is proved by Russia's growing anxiety over a pipeline that it cannot control.

Steve LeVine was a foreign correspondent who covered the Caucasus and Central Asia from 1992 to 2003, reporting for The Wall Street Journal, The New York Times, The Washington Post, Financial Times and Newsweek. In 2007, he wrote The Oil and the Glory, The Pursuit of Empire and Fortune on the Caspian Sea (Random House, $27.95).

The splendidly written book reads more like a mystery novel than a business history and provides a compelling account of the development of oil and gas resources in the Caspian region and the battle among nations, international oil companies, and middlemen to exploit those priceless reserves. The book centers on the contest to build and operate pipelines from that landlocked area.

In an interview with P&GJ, LeVine, who now lives in Washington, DC, discussed his findings.

P&GJ: Has the Caspian Basin so far proven to possess the oil and gas reserves that were anticipated?

LeVine: Yes and no. The Clinton administration and some of the oil companies, such as Amoco, vastly overstated the Caspian's potential reserves for political reasons during the early and mid- 1990s. They said the sea would produce 200 billion barrels of oil. I think that serious people realized at the time that these were politically inspired numbers. Getting down to reality, the reserves anticipated in offshore Azerbaijan were not realized; only AIOC and its 6 billion barrels of oil, plus Shah Deniz, panned out. Offshore Kazakhstan, however, turned out well. Kashagan has been everything that was desired.

P&GJ: What is the long-term outlook for energy development in this region? How likely are more pipelines to play an important part of the picture?

LeVine: Pipelines remain ultra-important. The outlook for connecting Central Asia - on the eastern side of the sea - to the West looks dimmer and dimmer. That's because Washington has been flat-footed and allowed Russia to steal a huge advantage in grabbing Central Asia's natural gas. One possibility, however, is that China could play the role in Central Asia that the U.S. played in the Caucasus in the 1990s. China says it will build a $26 billion natural gas pipeline from Turkmenistan into China. If that happens, it will change the geopolitical picture and provide Central Asia breathing space from Russia.

P&GJ: What was the eventual key to building the Baku-Ceyhan pipeline and how would you describe its strategic importance?

LeVine: Baku-Ceyhan is one of America's significant geopolitical triumphs of the last 15 years. It ties the Caucasus firmly to the West. The keys to making that happen were dual - Washington's persistence and BP's purchase of Arco. Regarding the latter, a long- reluctant BP finally acceded to U.S. demands to build the pipeline in order to help obtain federal approval for the Arco purchase.

P&GJ: What were the biggest technical and political challenges that had to be met along the way? Is it possible to separate business from politics here?

LeVine: It is impossible to separate politics from the business when one is discussing energy pipelines in the former Soviet Union. Azerbaijan and Georgia had to decide that they were going to challenge Russia's hegemony over the region, and thereby risk Moscow's wrath by building the monopoly-busting Baku-Ceyhan pipeline. As for technical challenges, BP and Exxon always made a big fuss over the technical challenge of building over high- altitude mountains in Georgia, but in the end I think the effort was fairly normal. No new technology needed to be developed to build the line.

P&QJ: Do you consider the Caspian the "final frontier" of the fossil fuel era?

LeVine: The Caspian is not the final frontier of the era, because new frontiers are opening in West Africa, Australia and elsewhere. But the Caspian era was, and to the degree it still exists, is the final heyday of Big oil, the last big oil rush of Big oil's swaggering days when it could call the shots. Now Big oil is at the mercy of national oil companies around the world. It no longer calls the shots.

P&J: What do you expect will be the long-term economic and geopolitical impact on the region?

LeVine: My own feeling is that the Caucasus - Azerbaijan especially - is going to continue its boom for another decade or decade and a half, then go into decline. It will contract the so- called Resource Curse, in the end not benefitting from its natural riches. But Kazakhstan could have long-term economic benefits, simply because its oil and natural gas are so much greater and will last so much longer than Azerbaijan's. So it has more of a chance, and more latitude for error, in setting its economy on the right track.

Geopolitically, the region is still a battleground for influence among great powers. Russia is far more effective, but the U.S. is not out of the game, and China is emergent as well.

P&GJ: Is there a chance that the local leadership will use the riches gained from their energy resources and the pipeline to push for reforms?

LeVine: If you mean democratic reforms, 1 think that is highly unlikely in the current generation and probably in the next as well. There simply is no sign that that's going to happen, and quite the contrary, in fact, looks probable - more autocracy. But I am optimistic in the long-term; a future generation could decide to let their citizens' votes truly count.

P&GJ: How would you rate the role Washington played in pushing the pipeline forward? Did U.S. policymakers get it right?

LeVine: U.S. policymakers got it precisely right in the 1990s, and deserve much credit for persistence against loud criticism from think tanks, European governments, and oil companies. They and the local Caucasus leadership are responsible for the pipeline being built. But then Washington forgot the lessons of Baku-Ceyhan and got it wrong in the second round of the pipeline struggle. It looks like Russia will be the one to carry Central Asian natural gas to Europe through Russian-controlled pipelines. The gas will not go through a Western-backed pipeline, it appears.

P&GJ: What is your view of Russia's relationship with its neighbors in regards to its energy strategy? Has the balance of power shifted away from Russia?

LeVine: On the contrary. Russia lost power in the Caucasus, but the leverage has shifted in Moscow's favor to its West - in Ukraine, Belarus, the Baltics and on into Eastern Europe - and to its south in Central Asia. I wouldn't say that Russia has exceedingly warm relations with many of its neighbors, but that's a different matter; Putin and his successor Dmitri Medvedev have been extremely successful in building up Russia's influence through energy.

P&GJ: Among the oil majors, what multinationals under which executives played the greatest roles in developing the Caspian Basin?

LeVine: John Browne at BP and a series of executives at Chevron. Executives at the other U.S. and European companies - Mobil, Shell, Total, Eni - were also important, but Browne and Chevron's leadership were key. And let's not forget the middlemen who actually finalized the deals - Jim Giffen of New York, John Deuss of Holland, and a slew of dealmakers on the Baku side.

P&GJ: How important were some of the individual relationships with various autocratic leaders? In international deals is it usually essential to have a middleman involved?

LeVine: Individual relationships were and are absolutely essential. A deal could not and cannot be done without them. The majors don't like to say so, but middlemen are key players in many or most of the big energy deals. It's just a fact.

P&GJ: Is there anyone in your mind who stands out in development of the Caspian?

LeVine: The single most important figure in my opinion was Heydar Aliyev, the late president of Azerbaijan (whose son Ilham is now president of the country). Aliyev, a former KGB general and member of the Soviet Politburo, decided he was going to take on the Kremlin in order to help make his new republic a real nation. Among the Caspian's leaders, only he had the guts and genius to conceive and execute the plan for the Baku-Ceyhan pipeline, and then see it through to triumph. Of course, he had strong partners in Georgia's Eduard Shevardnadze and the Clinton administration. But Aliyev is the father of the Caspian era.

P&GJ: It seems as though the producers were hesitant to get involved in building the Baku-Ceyhan or any other pipeline even though the costs would be shared. Why was that an issue for them, especially BP, and is that indicative of why the producers seem hesitant on moving forward with the Alaskan gas pipeline? LeVine: I was baffled at the time. I was also baffled that, through low oil prices and high oil prices, the major oil companies steadfastly refused to aggressively spend on exploration around the world. Some old-timers say Big oil has lost its nerve; it's a mature, risk- averse industry. On Baku-Ceyhan specifically, I think another reason is that they simply couldn't stand that Washington was pushing them so hard. Political pressure was anathema to them, even if they in principle agreed that the pipeline should be built.

P&GJ: What is your view of the role multinational oil companies will play as they compete with a growing number of government-owned entities?

LeVine: I think that at least some of the multinationals will form partnerships of one sort or another with the national oil companies. They will get in bed with them, mainly because they have no choice since they can't otherwise reliably replenish their reserves.

P&GJ: What would you suggest to energy executives looking to make deals in the Caspian region?

LeVine: Keep hope alive. Persuade Turkmenistan to hire a first- rate investment banker to be its honest-broker in negotiations to start getting its onshore natural gas fields producing. Turkmenistan doesn't have the confidence right now to stand toe to toe with the oil companies, which is why deals aren't being done. It needs a trusted party who can battle on its behalf with the oilmen at the negotiating table. Otherwise I am pessimistic that deals will get done there any time soon.

P&GJ: Will there be any role for Iran to play in future activity?

LeVine: It depends what you mean by future. Everything hinges on Iran's relations with the U.S. As soon as they stop being so frosty, Iran will get the energy deals it seeks on the Caspian.

Referred to as the Baku-Ceyhan or Baku-Tbilisi-Ceyhan pipeline, the system transports crude oil 1,776 kilometers from the Azeri- ChiragGuneshi oil field in the Caspian Sea to the Mediterranean Sea. Construction began in September 2002 with the pipeline officially inaugurated July 13, 2006. Total length of the pipeline in Azerbaijan is 440 km, in Georgia 260 km and in Turkey 1,076 km. With a projected lifespan of 40 years, it will ultimately transport 1 million bpd. The pipeline passes through Baku, capital of Azerbaijan; Tbilisi, capital of Georgia, and Ceyhan, a port on the southeastern coast of Turkey. The pipeline is owned by a consortium of energy companies led by the operator, BP.

(For more information visit www.oilandglory.com).

By Jeff Share/Editor

Copyright Oildom Publishing Company of Texas, Inc. Sep 2008

(c) 2008 Pipeline & Gas Journal. Provided by ProQuest LLC. All rights Reserved.