Foreign Suppliers Continue To Envy Azerbaijan’s Oil

azerbaijanoilForeign oil companies first arrived in Azerbaijan in the early years of this century, and the capital Baku was famous throughout the region for its elegant homes, wide boulevards, and sophisticated European touches, all thanks to oil money.

Following the Bolshevik Revolution, the Soviets took over the industry. After decades of bad management and questionable extraction techniques, they had largely driven it into the ground by the time the USSR collapsed in 1991.

Hearing reports of freshly discovered offshore fields and sensing a potential bonanza, multinationals like British Petroleum, Amoco, Exxon, Unocal, Statoil (Norway’s state oil company), Lukhoil of Russia, and Turkish Petroleum rushed in to sign development deals. Eventually, the multinationals along with the local Azeri oil company set up a consortium called the Azerbaijan International Operating Company (AIOC).

Consortium production is around 70,000 barrels a day, but the AIOC hopes to eventually boost pumping to more than ten times that figure when the three Azeri fields are fully developed, with around 500,000 barrels per day destined for foreign sales and dollar earnings.

However, getting the oil to market remains the hard part. Two pipelines, one from Baku to Georgia’s Black Sea port of Supsa and another from the Azeri capital to the Russian Black Sea terminal at Novorossiysk, c\an together only handle around 200,000 barrels per day, or a 300,000 barrel shortfall.

When the companies and other interested parties realized another pipeline was needed, the intrigue started. The United States was keen to ensure that any future pipeline crossed neither Russia nor Iran – the former because the US wanted Azerbaijan and the other Caucasus and Central Asian nations weaned off their historic reliance on Moscow and the latter because Washington is doing everything in its power to isolate the mullahs governing in Tehran. Furthermore, the US wanted to help exploit new oil sources, as Persian Gulf deposits are expected to decline soon, and at the same time aid US companies risking billions of dollars in investments in a very volatile region.

Ambassador Richard Morningstar, the Clinton administration’s point man on energy issues in the former Soviet Union, summed up US policy in a speech to area experts last fall, saying that these new nations at last “have a chance to seize their own destinies and develop into a band of stable and prosperous nations.”

“Helping them to achieve this vision, while at the same time enhancing our energy security, the energy independence of the region, and promoting opportunities for our companies, is clearly in the national interest of the United States,” he explained.

The United States favored a route from Baku, running through Georgia and then south through Turkey to that country’s Mediterranean port of Ceyhan, even though a new pipeline along this route could cost as much as $4 billion. This figure would be twice what it would cost to upgrade and expand the two Black Sea pipelines favored by the AIOC consortium, and with world oil prices plunging to historic lows, cost became an important issue.

Turkey was, of course, enthusiastic about the Baku-Ceyhan route, arguing that oil piped to either Supsa or Novorossiysk would have to be shipped aboard tankers passing through the Bosporus, a narrow and already overcrowded waterway that bisects Istanbul. Any accident or massive oil spill would be disastrous, according to Ankara.

In addition, Turkey was willing to turn up the heat on the oil companies to make sure it got its way. In November, its then maritime affairs minister, Burhan Kara, imposed harsher rules for tankers and other vessels in the Bosporus and threatened to significantly raise transit fees on the waterway. “Then they’ll see what happens to their dreams of cheap oil,” Kara said.

At the same time, Turkish press reports said the government-owned refinery operator was ready to stop buying crude from BP Amoco unless the AIOC loudly and clearly proclaimed its support for the Baku-Ceyhan route, which Turkey claims would only cost around $2.3 billion.

Once it appeared the oil companies were turning a deaf ear to the blandishments and threats and were ready to announce they preferred the Baku-Supsa route, Washington immediately huddled with Ankara to discuss incentives and credits for financing the Ceyhan pipeline that could sway the AIOC.

It may be working. At press time the consortium was still weighing the three routes, and Ambassador Morningstar was optimistic the multinationals were listening. “I think the AIOC position has modified because they understand the political realities of Baku-Ceyhan,” he told reporters in Turkey. “They are fully prepared to reach a joint conclusion and that is a constructive step.”

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