TURKEY - Baku-Ceyhan Oil Pipeline.

Ankara's proposal for a 1,730 km oil pipeline to be built from Azerbaijan to Ceyhan, passing through Georgia, has been the subject of arguments for years. On March 22, 2000, after five months of wrangling, the governments of Azerbaijan and Georgia announced that they had finally agreed to a compromise on Georgian transit fees. This removed the main obstacle preventing the Azerbaijan International Operating Co. (AIOC), a consortium led by BP AmocoArco and developing Baku's three main offshore oilfields, from putting together a plan to finance the proposed pipeline. Trying hard to help make the project attractive to financiers, the Ankara government in 1999 agreed to guarantee any overruns above its $2.4 bn cost estimate for the project, which includes $1.4 bn fur the Turkish segment of the pipeline.

The state-owned pipeline and gas distribution monopoly Botas, which will lead the construction within Turkey, is confident that this section can be built for $1.4 bn or less. Its CEO Gokhan Yardim was on April 5, 2000 quoted by 'The Financial Times' as saying: "The difference will be our profit. The main (variable) parameter in cost is steel prices".

The agreement to build this project was signed on Nov. 18, 1999 by the rulers of Azerbaijan, Georgia and Turkey, with US President Bill Clinton attending the ceremony and signing among the witnesses. The ceremony took place in Istanbul at the close of the summit of the Organisation for Securityand Co-operation in Europe (OSCE). The ruler of Kazakhstan signed a related accord committing a significant volume of Kazakh crude oil to the Baku-Ceyhan pipeline, which meant a section from Kazakhstan to Baku was to be built as well. The pipeline's ultimate capacity now is proposed to be 1.4m b/d, with the flow to average about 800,000 b/d in the intial phase from late 2004 or early 2005. Kazakhstan would be pumping up to 400,000 b/d of its crudes through this line. (Kazakhstan's main oil outlet, the Caspian Pipeline Consortium - CPC -, recently awarded the final contract for construction of a pipeline from Tenghiz oilfield to the Novorossyisk terminal. To be operational in October 2001, this would pump 560,000 b/d in the initial phase and over 1.2m b/d ultimately).

BP AmocoArco has set a deadline of October 2000 for raising the project finance and bringing together firm commitments to use the pipeline. Michael Townshend, the company's director of international affairs, said after the November 1999 signing ceremony: "The only way this is going to work is to make the pipeline as affordable as possible for shippers to put their oil down it. We're asking the United States government to attract as much oil as possible and to attract as much financing as possible". If that money is not in place in time, he added, BP AmocoArco "can try to get the oil out by a different route", by expanding the capacity of an existing 115,000 b/d pipeline from Baku to Georgia's Black Sea terminal of Supsa. The Supsa option would cost AIOC about $1.5 bn, at least $1 bn less than the Baku-Ceyhan option, and this is Georgia's preference.

Georgian President Eduard Shevardnadze who at the Istanbul signing ceremony on Nov. 18 hailed the deal as a "historic" event, still wants to see the Supsa option revived. In early 2000 he said he could not back the Ceyhan option before getting re-elected in April 2000.

After he was re-elected in April 2000 and pressed by Turkey's President Demirel and Premier Ecevit as well as Presidents Clinton and Haidar Aliyev of Azerbaijan, the Georgian president insisted on Tbilisi's demanded transit fee of 7 cents/barrel (instead of the 3 cents/b on offer) and the condition that at least 3% of the oil stays in his country. Shevardnadze argued that for the Supsa option Georgia was getting a fee of 20 cents/b.

With the final agreement now in hand, and assuming that the funds will be made available and construction begins in 2001, the flow of Azeri and Kazakh crude oils should begin by early 2005 and reach 1.4m b/d by 2012. Ankara wants the line to run through Tbilisi in Georgia and the Turkish cities of Erzurum, Erzincan and Kayseri, before going to Ceyhan. The crude oil from Kazakhstan would be pumped from the vast Tenghiz field through a pipeline to be built beneath the Caspian Sea to Baku.

Ceyhan-Black Sea Oil Pipeline: In June 1996, the energy ministers of Ukraine and Turkey signed an agreement for a 500,000 b/d pipeline to be built from Ceyhan to the Turkish Black Sea port of Samsun mainly to meet Ukraine's oil needs. The 770-km pipeline was then estimated would cost around $600m.

However, this project has since been overshadowed by the Blue Stream gas venture (see following pages) and by Moscow pressure on Ankara to scrap the proposed link to Ukraine. Ukraine lacks oil resources and is currently dependent on Russian oil.