Political oil supply

June 23, 2003
Construction has begun on an oil pipeline important both for what it is and what it is not. The project is called BTC for the three cities it connects: Baku, Azerbaijan; Tbilisi, Georgia; and Ceyhan, Turkey.

Construction has begun on an oil pipeline important both for what it is and what it is not. The project is called BTC for the three cities it connects: Baku, Azerbaijan; Tbilisi, Georgia; and Ceyhan, Turkey.

Since its conception, the BTC pipeline has drawn the active—some would say aggressive—support of the US government. The reason for that support is what the pipeline is not: an export route for Caspian Sea oil that doesn't transit Iran, Russia, or Armenia. The pipeline is nevertheless very important for what it is—or will be when completed at the end of next year and placed in operation in 2005: a way for as much as 1 million b/d of Caspian oil to reach the Mediterranean without aggravating tanker congestion in the Bosporus Straits through Istanbul.

The BTC is important for other reasons, of course. It will accommodate further development by Azerbaijan International Operating Co. of the Azeri-Chirag-Gunashli (ACG) complex off Baku. It will be a financial and engineering challenge, requiring investment of $2.95 billion, buried along its entire 1,040 mile length, traversing diverse and sensitive terrain, and crossing the Caucasus. The pipeline also will establish much of the route for the South Caucasus Pipeline, which will carry gas to Ezurum, Turkey, from the giant offshore Shah Deniz gas and condensate discovery under development southeast of the ACG complex.

Geopolitical motives

With construction under way, financial and engineering achievements rightly eclipse geopolitical motives behind indispensable US support for the project. But those motives need attention. The US expends much diplomatic energy trying to manipulate sources, destinations, and—in the case of the BTC pipeline—transport routes of internationally traded oil. The strategy that derives from these exertions is incoherent and at times self-contradictory.

Since the BTC pipeline was conceived, for example, relations between the US and Russia have improved. In fact, the US now hails Russia as an oil supplier preferable to the Middle East. BTC, however, sends a different message. And it can hardly improve the abysmal relations between the US and Iran.

As with Russia, the US government often extols Caspian oil for not coming from the volatile Middle East. Yet the Middle East, volatile as it is politically, has proven in recent years to be a reliable source of supply. Oil flowed abundantly from Middle Eastern producers during the war in Iraq. It's flowing abundantly now despite deadly violence in Israel.

What's more, the Caspian is no model of tranquility. The BTC pipeline transits Georgia, whose relations with Russia are testy at best, in order to avoid Armenia, historically at odds with Turkey and Azerbaijan. Armenia and Azerbaijan quit fighting over Nagorno-Karabakh in 1994 but haven't settled the issues in dispute, among which are hundreds of thousands of refugees displaced by war. Armenia, supported militarily and economically by Russia during the conflict with Azerbaijan, has turned away from its former benefactor, calling for the departure of several thousand Russian soldiers. And Russia has its own source of instability in largely Muslim Chechnya.

It's a mistake, therefore, to prefer Russia and the Caspian to the Middle East as sources of oil because they're less volatile. They're not. In fact, it's a mistake to prefer any single producer or region over others under modern market conditions. It is, however, altogether sensible to encourage development of supply from as many sources as possible. There's an important distinction to be made between these approaches—a distinction that gets lost when governments use oil trade to pursue their geopolitical objectives.

Need for oil

In fact, the world needs oil from as many sources as possible—and a lot of it. Saudi Petroleum Minister Ali I. al-Naimi put the issue in tidy perspective on June 3 at the opening of the Caspian Oil & Gas Exhibition in Baku. Citing projections that oil demand will grow by 30 million b/d through 2020, he said: "This additional supply will only develop in an environment of stable oil prices and will require large and continuing investments in all parts of the world and at all levels of the industry."

The challenge is great. Political manipulations of sourcing and transportation can only compound the difficulty and raise the price of success.