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Pipeline dreams? Jon Gorvett reports on the return to life of one of the region's oldest, post-Soviet chestnuts, the Baku-Tblisi-Ceyhan pipeline. (Business & Finance).

Dismissed as a billion dollar white elephant, a politically motivated project that made no business sense, it might come as a surprise to some to learn that the engineering study on where to lay the pipe is underway, the political structure is in place and major lenders are now being contacted for financing. US State Department Senior Advisor on Caspian Energy Diplomacy Steven R Mann now says that he is "In sum, very optimistic" while Toby Odone, a spokesman for the pipeline developers' leading company, BP, says that "the pipeline is moving ahead."

All this is a far cry from a year -- or even six months -- ago, and comes at a time when major developments in Central Asian and Caspian energy development are coming thick and fast -- along with prospects for some equally unexpected political settlements.

While projects the size of trans-national pipelines have very long lead times and require much long term planning, it is nonetheless tempting to say that the strategic developments since 11 September and the conflict in Afghanistan have played a role in this -- at least in so far as they seem to have removed some of the political blockades that had frozen activity, and in particular regarding US-Russian relations, which had previously been seen as in direct competition in the region.

Whatever the case, Russia is now emerging as the decisive player in Central Asian and Caspian energy, a resource that while at present only matches that of the North Sea or North America, could potentially rival Middle Eastern production in the years to come. Vast underground and under the sea bed oil and gas fields are thought to exist in Kazakhstan, Azerbaijan and Turkmenistan, while research is also going on as far afield as Pakistan into further extensions of these subterranean resources. While during Soviet times, these energy reserves had been largely undeveloped, nowadays bringing them on line has become a major concern of oil multinationals as well as governments.

And 2001 saw some of this begin to happen. In October, the first oil began to flow down the Tengiz-Novorossisk pipeline, taking Kazakh oil from the giant Tengiz field to the Russian Black Sea port. Kazakh Energy Minister Vladimir Shkolmik told reporters that this route, known as the Caspian Pipeline Consortium CPC) should "meet Kazakhistan's oil export needs until 2007" with its 600,000 barrels per day (b/d) capacity. Meanwhile, the Ukrainians announced the opening of the Odessa-Brody pipeline in December, which provides a link from the Black Sea port into the main Ukrainian and Russian pipeline routes overland into Europe and the Baltic. With this facility, Caspian and Central Asian oil can be transferred by ship from Novorossisk or Supsa to Odessa and thus back into the old, Soviet era pipeline network.

Russia has also been busy cultivating its relationship with Greece. One of the strategic difficulties with bringing Caspian and Central Asian oil to market by tanker through the Black Sea has been Turkey's objections to using the Sea's one exit route -- the Turkish Straits of the Bosphorus and Dardanelles -- as a transit route. Ankara objects on the grounds that collisions in the Bosphorus -- which runs right through the heart of Istanbul -- might cause appalling casualties, in addition to pollution risks.

In December then, Russian president Vladimir Putin was in Athens for talks with Greek prime Minster Costas Simitis. With him was a group of Russian businessmen, including the CEO of the Russian oil company Lukoil, Vagit Alekperov, and the then head of the Russian gas company Gazprom, Alexei Miller. This was taken as a sign of progress on another gas pipeline project, the Burgaz-Alexandroupolis route. This would bypass the Turkish Straits altogether by docking tankers laden with Caspian and Central Asian oil at the Bulgarian Black Sea port of Burgaz, shipping the fuel south to the Greek Aegean port of Alexandroupolis, where it could then be reloaded and shipped on.

Up to now, the sticking point on this has been Bulgarian demands for a transit fee seen as too high by Moscow and Athens. It seems that Putin and Simitis agreed to extend their cooperation on this issue, with a likely strengthening of pressure on the Bulgarians to change their demands.

Meanwhile, back in the Caspian, there are signs of a number of other changes. Distribution of Caspian resources has long been a bone of contention between the five littoral states -- with no agreement so far being made between them on how to divide the seabed or the sea itself, an issue that emerged on the collapse of the Soviet Union, when Kazakhstan, Turkmenistan and Azerbaijan were brought into existence, each with a substantial Caspian seaboard.

Russia's position on this is to divide the seabed along a "modified median line", while keeping the Caspian's waters as common territory between all five states. Kazakhistan and Azerbaijan have signalled their agreement with this, but Iran has objected strongly. Tehran fears an open waters policy would leave the sea dominated by the Russian Caspian naval flotilla, one of the few Russian naval forces that has been constantly maintained since the Soviet Union's collapse. It would also mean the more developed Russian fishing fleet being able to roam where it chose. Turkmenistan, which has long been Iran's closest ally in the region, has until now backed Tehran, leaving a deadlock, but now that may be about to shift too. Later in January, Putin has invited both Azeri President Haydar Aliyev and Turkmen President Saparmurat Niyazov to Moscow to discuss the issue, and there are signs that the Turkemens may be about to perform a volte face. Russia has some strong cards against the Turkmens -- number one of which is the threat that Russia may channel all its Central Asian energy needs into Kazakhstan, leaving Turkmenistan out of any energy distribution loops.

If Russia manages to isolate Iran on the Caspian question, it may then be a shorter step to a resolution of the whole issue in Moscow's favour -- finally establishing just who owns what in terms of seabed resources. This would free up many fields for exploration and development, further boosting the need for pipelines to distribute Caspian resources.

Which brings us back to Baku-Tblisi-Ceyhan (BTC). Given the strong support for this route from the US and Turkey -- who both see it as a political bond that could extend their influence through the region -- Russia has traditionally seen this route as a rival. The Russian Foreign Ministry had thus previously banned Russian companies from any involvement in "geopolitically competitive" Caspian projects. However, in perhaps the clearest indication yet of how the war in Afghanistan has changed the mood, after a meeting between Putin and British Prime Minister Tony Blair in December, it seems now that Lukoil will take up to a 7.5 per cent share in the BTC sponsoring group. Putin himself is said to have given them the go ahead, effectively ending Russian objections to the deal. Another Russian company, Yukoz, is also reportedly in talks to come in as well.

Meanwhile, Russian and US officials are also scheduled to meet in February to discuss another thorny subject with energy implications -- Iraq. Russia has some US$860 million worth of contracts with Baghdad, frozen since the sanctions regime was brought in after the 1991 Gulf War. Apparently, the US has agreed to lift the embargo on US$54 million of these and look into many others. Much of this involves energy, with the Russian state owned overseas project operator Zarubezhneft organising around 150 million b/d of Iraqi crude in the oil-for-food deal.

All of which adds up to a surprising turnaround for regional energy politics. While much can still happen, and the unexpected should still be watched out for, it may well be that 2002 will see BTC finally get off the ground -- and further fruits of Russian-US rapprochement could also be ripening in the Caspian's orchards.
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Comment:Pipeline dreams? Jon Gorvett reports on the return to life of one of the region's oldest, post-Soviet chestnuts, the Baku-Tblisi-Ceyhan pipeline. (Business & Finance).
Author:Gorvett, Jon
Publication:The Middle East
Geographic Code:4EXRU
Date:Feb 1, 2002
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