Azerbaijan-Georgia Corridor: Growing Transit Volumes Bolster Security

Russia’s invasion of Georgia severely disrupted the operation of the energy transit corridor during August and September, causing revenue losses in the hundreds of millions of dollars to Georgia, Azerbaijan, and the oil and gas companies. Physical damage to the corridor, however, turned out to be scant and has to all intents and purposes been removed since then.

Whether Russia’s war aims included discouraging Western investment in further development of the corridor or whether this goal became a byproduct of the invasion is far from certain. What does seem certain, however, is a retrospective attempt to undermine business confidence in the transit corridor by invoking the August-September events, portraying the damage as long-lasting, the psychological effects as enduring, the risk profile as soaring, and a switch to Russian transit routes as necessary. Some Russian representatives are taking this line currently at think-tank conferences in the United States and Europe.

These claims, however, are not proving persuasive to governments, international organizations, or companies. On the contrary, the use of the Azerbaijan-Georgia energy transit corridor is slated for continued expansion, and new investments are being planned accordingly (see EDM, September 29, November 5).

On November 14 the European Commission unveiled a long-term, multidimensional program for energy security, which includes creating a Caspian Development Corporation to invest in the development and transport of natural gas from Central Asia to Europe. This concept presupposes enhancing the use of the South Caucasus transit corridor (Kommersant, November 17). Two weeks earlier, a U.S. delegation including the Overseas Private Investment Corporation (OPIC) president, the Eximbank CEO, and the Trade and Development Agency director held out the prospect of substantially increased U.S. investments in Turkey, “in order to facilitate the westward flow of Caspian resources.” This move is also closely linked with the intentions to expand the South Caucasus corridor. The delegation’s head, Deputy Energy Secretary Jeffrey Kupfer, “reaffirmed the U.S. government’s commitment” to this strategy: “In the aftermath of the Georgia crisis, its importance has been underlined. The Southern Corridor to carry Caspian gas to Europe is an essential part of this strategy” (Today’s Zaman, November 1). A major new element in both these moves is financial backing by the European Commission and the U.S. government for these energy projects.

EU Energy Commissioner Andris Piebalgs and U.S. Energy Secretary Samuel Bodman, along with heads of state and government from some 12 countries, signed the declaration of the energy summit just held in Azerbaijan (see EDM, November 17). The document envisages expansion of oil and gas supply routes from the Caspian basin to European markets, including Nabucco and the Turkey-Greece-Italy Interconnector, both reliant on Azerbaijani gas via Georgia (Trend, November 17).

During the Baku summit, Azerbaijan’s State Oil Company and its Kazakh counterpart KazMunayGaz signed an agreement to form a joint system for transporting Kazakh oil to international markets via Azerbaijan. Signed by the companies’ presidents, Rovnag Abdullayev and Kairgeldy Kabyldin, the agreement of intent envisages 500,000 barrels per day (bpd) or 25 million tons to be delivered during the first stage; 750,000 bpd or some 37 million tons in a subsequent stage; and reaching a plateau of up to 1.2 million bpd or some 60 million tons for shipment across the Caspian Sea to Azerbaijan. With investments estimated at $3 billion, the transport system should be ready for full-throttle operation by 2012. (www.day.az, November 14; Financial Times, November 17).

The 2012 target date suggests that the transport system is planned in correlation with the development of Kazakhstan’s two largest oilfields: the ramp-up of production at Tengiz (long held back by Russia’s extortionate preconditions to enlarging the Tengiz-Novorossiysk pipeline’s capacity) and the recently rescheduled start of commercial production at Kashagan (see EDM, November 5). This transport system should open a westbound route to redirect a large share of Kazakh oil exports away from Russian routes.

Also during the Baku summit, Kazakhstan’s Energy and Mineral Resources Minister Sauat Mynbayev announced that negotiations were under way for using the Baku-Supsa (Georgia) pipeline and the Supsa maritime terminal for transporting Kazakh oil. Kazakhstan is willing to invest in the expansion of the Baku-Supsa line, which is owned by a BP-led consortium. BP is said to be withdrawing from the Tengiz-Novorossiysk pipeline company (Caspian Pipeline Consortium-CPC) (Interfax, November 14).

In October of this year, field operator TengizChevroil finalized an agreement with the BP-led Baku-Tbilisi-Ceyhan pipeline company (in which Chevron is a minority shareholder) to increase the inputs of Tengiz oil into that pipeline. The reported target is 98,000 barrels per day (bpd) or some 14,000 tons daily, to be reached next year. Shipments during the remainder of this year are expected to run at approximately 70,000 bpd or some 10,000 tons daily (Turan, APA, Reuters, November 3; Interfax, November 5).

The westbound route offers several options for oil shippers from Kazakhstan. They can either use the Baku-Ceyhan pipeline via Georgia, the pipeline to Supsa, or the railways to Batumi and Poti on Georgia’s Black Sea Coast (in addition to the Azerbaijani-owned Kulevi terminal near Poti). Russia’s recent invasion, coupled with its monopolistic approach to transit, has only underscored the importance of the Azerbaijan-Georgia transit corridor. Growing international reliance on it translates into a higher level of security for this route.