Baku-Ceyhan pipeline

Dec. 20, 1999
The article on the Baku-Ceyhan crude pipeline is a good summary of available information, but it does not cover some of its fundamental aspect (OGJ, Nov. 15, 1999, p. 23).

The article on the Baku-Ceyhan crude pipeline is a good summary of available information, but it does not cover some of its fundamental aspect (OGJ, Nov. 15, 1999, p. 23).

The basis of this pipeline is the "detailed feasibility study to evaluate the technical, economic, financial, and environmental viability of the Baku-Ceyhan crude pipeline" carried out by the German construction company PLE for the Turkish government and funded by the World Bank. This study generated, among other things, the anticipated pipeline route and cost figure that are being discussed by the parties involved in deciding how crude will be transported from the Caspian area. Some of the proposed pipeline cost figures appearing in the press can be traced back to some numbers in this study.

The agreement signed in Istanbul is an expression of the political will to see the Baku-Ceyhan crude pipeline become a reality, and for this to happen the oil producers have to deal with ownership, operation, and raise the money to build the pipeline. They need to accept the design, construction, financial, and operational aspects as well as the overall investment and operating cost the feasibility study had produced or take a new look at these aspects.

This may lead to reviewing some and optimizing other parts of the feasibility study to arrive at a point where the estimated investment cost is firm, final, and acceptable to all parties involved. Building a pipeline using an initial study estimate with a proviso that a government will cover potential overruns may not be able to create confidence in both lenders and potential owners.

A reduction in the overall cost can also be achieved by separating the pipeline from the loading and receiving facilities in Baku and Ceyhan and make them locally owned, financed, built, and operated. While there are indications that some efforts have or are taking place, two total investment figures are still being mentioned, meaning that more scope clarifications, optimization, and cost estimating can be expected.

At this stage, the availability of crude for the Baku-Ceyhan pipeline may be given too much weight. Its investment cost, overall economics, and pipeline operating conditions may not call for 1 million b/d to flow through the pipeline from day one, and by 2004 or so the crude picture (rates and reserves) can very well be different from what is projected and discussed today.

R.A. Calenoff
Economic Development & Management Consultant
Dallas