AZERBAIJAN - Pipelines.

Baku, with US backing, wants to be the hub for oil and gas pipelines from the Caspian to Europe. The Caspian, the world's largest inland sea, stands between the oilfields of western Kazakhstan and Europe. Washington has been promoting a set of trans-Caspian pipelines for oil and gas to reach Europe through Baku and Turkey's Mediterranean terminal of Ceyhan, with the US Trade and Development Agency having spent $750,000 on feasibility studies.

However, experts have warned about the unpredictable and active seismic nature of this partly shallow sea. Pipelines laid on the seabed would be exposed to risk yet to be studied. Years before Amoco of the US was bought by BP in 1999, Amoco Eurasia proposed a cheap alternative: a fleet of tug-pushed, double-hulled barges to ply across the sea from Aktau (Kazakhstan) to Baku. They would carry up to 500,000 b/d of Kazakh crudes. From Baku the crudes and AIOC's exports, would be pumped by pipeline. The fleet, to cost about $400-500m, could be put into operation within 30 months.

The 1st Pipeline - Northern Route: The state oil company Socar and its partners, now producing 190,000 b/d, began exporting crude oil in early 1997 through a reversed pipeline running 1,411 km from AIOC's offshore field of Chirag to Russia's Black Sea port of Novorossiysk. The pipeline passes through Chechnya's capital area of Grozny. It was reversed and rehabilitated for AIOC to export "early oil". AIOC began producing crude oil from Chirag on Nov. 7, 1997. The Russian portion of this system is controlled by the Russian pipeline company Transneft.

The first batch of AIOC's crude oil to Novorossiysk crossed the Azerbaijani border on Feb. 28, 1998. This shipment had been caught in a dispute between AIOC and the Russian authorities over a demand for additional customs duties, levied by Transneft. Russian authorities had insisted that AIOC pay 0.015% of the value of the oil on the consignment transported across the Russian portion of the pipeline, before it would be allowed to pass through Novorossiysk. Transneft had argued that none of AIOC's members were registered companies in Azerbaijan, but rather registered offshore, and therefore subject to extra duties. AIOC insisted that, according to an inter-governmental agreement signed by Russia and Azerbaijan in January 1996, the consortium was exempt from paying any extra fees on oil transported across Russia. An AIOC spokeswoman later said: "The matter was settled according to the terms of the inter-governmental agreement, whereby AIOC will pay $15.67 per ton to Transneft at the end of the shipping period. That is all we will pay".

However, the pipeline was closed on March 29, 1999, because of a dispute over tariff payments to Chechnya. Pumping was resumed later. But Transneft built a 312 km detour section to avoid passing through Chechnya, where rebels caused disruptions on several occasions, and this was completed in April 2000. By then, Transneft had switched to transporting the Azeri crude by rail, avoiding Chechnya. The Chechnya section was 150 km long.

The 2nd Pipeline - Western Route: While Socar now exports its share of AIOC's production and some of its own output through the pipeline to Novorossiysk, AIOC exports its share through a second pipeline built through Georgia. On stream since April 1999, this runs 917 km from Baku's terminal and storage farm of Sangachal to the Georgian port of Supsa and has a capacity of 100,000 b/d. The pipeline cost $590m, compared to an original estimate of $315m. The pipeline can easily be expanded to carry 150,000 b/d.

Georgia earns $7m and the government of Azerbaijan gets $10m in annual oil transit tariffs from the pipeline. A proposal to expand this system to 800,000 b/d to handle AIOC's maximum production level in the coming years was dropped in favour of a new pipeline to be built to Ceyhan.

The Final Pipeline: A 1,750-km, $2.94 bn pipeline to carry the bulk of AIOC's plateau production to the Turkish Mediterranean terminal of Ceyhan, to pass across Georgia's capital Tbilisi, was finally agreed upon by the governments of Azerbaijan, Georgia and Turkey and AIOC during a summit in Istanbul in November 1999. The accord was ratified by the three states.

The November 1999 signing ceremony in Istanbul was attended by then US President Clinton and his counterparts from Azerbaijan, Georgia, Kazakhstan, Turkey and other states of the Organisation of Security and Co-operation in Europe (OSCE). Then these leaders were attending OSCE's Istanbul summit. President Nazarbayev of Kazakhstan signed a related document providing for Kazakh crude oil to be pumped to Ceyhan through the pipeline. The pipeline should be completed in late 2004 for pumping to begin in early 2005. Its capacity will be 50m t/y (over 1m b/d). Later this could be expanded, even doubled if it is to carry crudes from Kazakhstan and other Caspian states.

The Baku-Tbilisi-Ceyhan (BTC) pipeline will be run by a company just being formed and called BTC Pipeline Co. It will be owned by nine companies as follows: BP (34.76%), Socar (25%), Unocal (8.9%), Statoil (8.71%), TPAO (6.87%), Agip (5%), TotalFinaElf (5%), Itochu (3.4%) and DeltaHess (2.36%). Seven of these partners are in the BP-led AIOC. LUKoil, ExxonMobil and Pennzoil, also shareholders in AIOC, have chosen not to join the BTC venture.

Agip, operator of Kazakhstan's offshore oil super-giant Kashagan, joined the BTC venture in 2001. TotalFinaElf joined the venture in early June 2002. Both got their 5% equity from Socar. Both have in mind the prospect of getting Kashagan oil exports to be routed through the BTC pipeline.

The nine BTC shareholders gave their final approval of the pipeline project and financing in July. The plan is to have the pipeline finance in place by the first quarter of 2003. About 30% of the $2.94 bn will be provided by the nine shareholders. The remaining 70% will be debt finance to be raised from banks, export credit agencies and multilateral lending institutions.

The European Bank for Reconstruction and Development (EBRD) is negotiating to provide a $150m syndicated loan, with the approval process for this to be completed by end-2002. The US investment agency OPIC said in June it will allocate $300m to cover the political risk involved in the pipeline's construction and operation. OPIC said it will also facilitate commercial financing for the project.

By end-2002 the main contracts for the pipeline will have been awarded, so that construction will begin in early 2003. The pipeline will consist of three sections: about 450 km in Azerbaijan; 25 km in Georgia (with an existing 225 section of an old pipeline to be used; and 1,050 km in Turkey. Eight pumping stations will be needed. Its start-up at the beginning of 2005 will coincide with the coming on stream of the first phase of the Azeri-Chirag-Gunashli (ACG) complex of fields, in Azeri water, which will be producing 350,000 b/d.

So far, the BTC shareholders have spent $27m on a basic engineering study, and $150m in a 12-month detailed study. Among other things, the latter study defines the construction corridor and the exact route of the pipeline and the exact route of the pipeline, the environmental aspects of the project, volume commitments, contracts for construction and the financing of the project.

BTC Pipeline Co. will also act as a "shipper" of crude oil for those AIOC partners that have not joined this venture - LUKoil, ExxonMobil and Pennzoil. Negotiations with the companies are expected.