Georgia seeks upper hand on Baku-Ceyhan pipeline project

After months of delay on the planned Baku-Ceyhan pipeline for Caspian Sea oil exports, the focus has fallen on Georgia's demands. Progress on the Baku-Ceyhan oil line between Azerbaijan and Turkey has been stalled for 3 months due to Georgia's conditions for the route, which crosses its territory.

Aug 7th, 2000


MOSCOW�After months of delay on the Baku-Ceyhan pipeline for Caspian Sea oil exports, the focus has fallen on Georgia's demands. Progress on the Baku-Ceyhan oil line between Azerbaijan and Turkey has been stalled for 3 months due to Georgia's conditions for the route, which crosses its territory.

Although participating nations signed a series of pacts at an Istanbul summit Nov. 18, they were unable to complete a host government agreement with Georgia in time. The country has since pressed a series of demands, prompting a BP official recently to call the lack of progress "frustrating."

Oil industry officials have grown impatient with Georgian demands that have blocked progress on this major Caspian Sea oil export project. But some reports suggest that the sticking points may be minor compared with the project's overall costs.

Officials of Georgia, Turkey, and Azerbaijan met in Baku recently to resolve the key remaining difference over transit fees. Georgia has reportedly sought 20�/bbl for the oil that will traverse its territory in the $2.4 billion line.

BP Amoco says other demands related to security, environmental damage, and compensation for land have already been settled. Strictly by the numbers, the fee would bring $73 million/year to Georgia when deliveries reach a peak of 1 million b/d.

It is a relatively small sum for a project that may yield more than $100 billion in total revenues for the Azerbaijan International Operating Co., which is developing Caspian offshore fields. But the gains for Georgia could actually be even smaller.

The country is already said to be earning 17�/bbl for the "early oil" exported through its Black Sea port of Supsa. The 3� difference in rates for Baku-Ceyhan translates to only $11 million/year, an amount that could soon be dwarfed by the cost of project delays.

Negotiations appear to be strained because the partners in Baku-Ceyhan have already negotiated an overall transit fee of $2.58/bbl, with $1.59 of it reserved for Turkey. As a result, Georgia's demand may have the effect of pitting it against Azerbaijan, which might have to take a smaller share.

Georgian ambition
The real key to the problem may be Georgia's plan to build a refinery at Supsa that could make it a top exporter of fuels to neighboring nations.

After months of focus on the interests of Turkey and Azerbaijan, the importance of Georgia is now becoming clearer as an energy gateway between the Caspian Sea and the countries bordering the Black Sea. Georgia's demands are said to include a share of the crude that would flow over the Baku-Ceyhan line. The oil would be processed at Supsa and Georgia's existing refinery at Batumi.

Last week, officials of the Georgian International Oil Corp. said construction of the $300 million refinery at Supsa would begin only after final agreements are reached on Baku-Ceyhan.

Georgia's ambition may be seen in the plan to eventually raise the capacity of the new refinery to 240,000 b/d. Sources for supply include not only Azerbaijan but also Kazakhstan. Potential markets for fuel exports are northern Turkey, Ukraine, Moldova, Bulgaria, and Romania.

Refining and exports offer Georgia a chance to multiply its transit earnings many times over by selling higher-value products. The plan may not necessarily depend on completion of the Baku-Ceyhan line. Georgia is already host to the only working pipeline from the Caspian with its line to Supsa. The country also moves oil from Kazakhstan to the Black Sea by rail.

Those routes will likely be expanded to ship far greater volumes of Caspian-area oil if Baku-Ceyhan is not built. Either way, Georgia wins.

Georgia's commanding position may account for its persistence in negotiating its demands. It may feel heavy pressure from Russia, which wants Baku's oil to flow to Novorossiisk. But here, Georgia may also gain the upper hand.

Some analysts believe that Russia will need Georgia to complete its plans for delivering more gas to Turkey if its ambitious scheme for laying a pipeline under the Black Sea cannot be realized. In fact, plans have already been reported for a new Russian gas line through Georgia to Turkey. Such a route would give Tbilisi even greater leverage as the energy crossroads of the Caucasus.

So, while Georgia's demands on Baku-Ceyhan may appear frustrating and small, its larger plan could prove significant for the region.

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