COMMENT: Trans-Caucasus transport agreement is needed to solve Caspian problem

M.G. Melconian
President
PetroTechnologies Inc.
Princeton, N.J.

John H. Lichtblau, chairman of Petroleum Industry Research Foundation Inc., made a rational case against U.S. sanctions toward Iran by arguing that the sanctions hurt U.S. oil company competitiveness in the Caspian region (OGJ, Aug. 11, 1997, p. 19).

While there may be a case for relaxing the sanctions now that access to Caspian oil is a high priority for the U.S., Lichtblau was incorrect in claiming that the U.S. prohibition measure on government assistance to Azerbaijan in the Freedom Support Act of 1992 is hurting U.S. corporations doing business there.

The prohibition is in response to Azerbaijan's blockade of Armenia over the conflict in Nagorno-Karabakh, a Delaware-sized enclave inhabited by mostly Armenians. Karabakh was incorporated into Azerbaijan by Stalin when he carved up Soviet territories to suppress ethnic and religious groups.

Azeri development

Several U.S. oil companies have signed lucrative E&P contracts with Azerbaijan (OGJ, Aug. 11, 1997, p. 24). Azeris value those deals at $10 billion.

While details are confidential, one deal reportedly includes a production-sharing agreement for up to 2 billion bbl of Caspian crude oil.

Several other contracts with U.S. companies have been reported in the past few years. Azeri sources report that the U.S. is the largest foreign investor in Azerbaijan, with 30% of the country's total foreign investment.

It was not surprising to see Azeri President Haider Aliyev given a warm welcome during his recent July visits to Washington, D.C., Houston, Chicago, and New York.

Aliyev, a 74-year-old wily politician and politburo survivor, has been very successful in ingratiating himself, alternately, to the Russians, Europeans, Iranians, Turks, Saudis, and most recently the U.S.

Aliyev has played his "oil cards" well, luring governments, business, and oil interests to Azerbaijan, some committing to pretty daring "deals of the century."

Thus, the point is not whether U.S. companies are hurt or at a disadvantage in Azerbaijan, but whether these companies are making the "right" deals in keeping with U.S. energy policy goals.

The risks

The cornerstone of that policy is security of oil imports through diversification of sources. The policy recognizes U.S. dependence on imported oil, which the U.S. Department of Energy forecasts will exceed the current 50% by 2010-that is, if sources other than the Middle East are not tapped by then.

The security of oil supplies from the Middle East has always been a concern. Without contradicting the policy, one can argue that, if Middle East oil is a concern, then prospects of Azeri oil must rank as a nightmare.

When it comes to Azerbaijan, there are serious political and security risks facing U.S. oil companies aspiring to do business in the region.

Experts on the Caspian area advise that Azerbaijan is a highly diverse country with about 100 ethnic groups and clans spread across a divided country and its borders, all seeking various levels of autonomy. The Aliyev government poses as national but is really one clique ruling over others.

It is neither democratic nor national and survives on the promise of future oil riches. It has lost the Karabakh war with Armenia and refuses to compromise, at least for now.

Meanwhile, a fragile cease-fire is in place, and Azerbaijan continues its economic blockade of Armenia. Some analysts argue that Azerbaijan is counting on future oil money to resume the war with the Armenians and possibly with others in the region: a dangerous political game putting oil resources and investment in the region at great risk.

Azerbaijan is involved in two other contentious issues. First is ownership of the Caspian oil reserves, and second is the routing of oil export pipelines.

On the ownership issue, it is clear that there is little common ground on the definition and delineation of the Caspian territorial waters between Azerbaijan and the other states bordering the Caspian Sea (Iran, Russia, Kazakhstan, and Turkmenistan). Reports are that ownership of several Azeri offshore fields-Chirag, Azeri, and Guneshli oil fields-under development by U.S. and other oil and gas companies, is being contested by Turkmenistan, posing future operating problems for the oil companies.

The second critical issue facing oil companies in Azerbaijan is the routing of one or more pipelines for export of Azeri oil across the Caucasus to world markets. While Russia and Georgia are very keen for the so-called Azeri "early oil" to move through pipelines across their territories to ports on the Black Sea, these pipelines are essentially hostage to ethnic threats and political uncertainties in their regions.

On the other hand, Turkey, while actively pursuing a feasibility study for a major Azeri oil pipeline across Armenia and/or Georgia and through Turkey to the Mediterranean, has to contend with its ethnic Kurdish problem and closing of its border with Armenia over Azerbaijan's problem with the Karabakh Armenians.

The oil companies, who have much to gain, have every reason to expect Azerbaijan to settle its dispute with the Karabakh Armenians so that this important pipeline can move forward. Armenia, which has every reason to hope for the pipeline to pass through it, is hanging in there.

Lichtblau was correct in saying that all the proposed pipelines in the Caspian region have inherent political, security, and environmental problems. He was not objective, however, in suggesting that a pipeline through Iran, selling Azeri oil at the Persian Gulf, is more feasible than a pipeline through Armenia and Turkey to the Mediterranean.

Considering Iran's troublesome politics in the region and the commercial interests of OPEC producers in the Persian Gulf, it is likely that Azeri oil would be more welcome and U.S. strategic interests better served at the Mediterranean than at the Persian Gulf.

The outlook

Under such untenable and uncertain conditions, it is difficult to foresee Azeri oil going anywhere in significant quantities anytime soon. To be sure, studies, proposals, press releases, and even well-intentioned agreements will proliferate, but no major investment and production seems likely or secure until a "regional export system" for Azeri oil is developed and supported by all parties in the region.

While Azerbaijan's enormous oil reserves dwarf the modest oil and gas prospects in Georgia and Armenia, access to the strategic right-of-way and resources of the latter countries is needed for the successful development of a reliable oil export system across the Caucasus.

Ideas along these lines have been put forward recently by U.S. government officials and others, including former Secretary of State James Baker.

U.S. oil companies understand the risks involved in energy projects better than most. The question is what strategies they will pursue in the Caucasus to ensure availability of Caspian oil to world markets.