Publication: Monitor Volume: 7 Issue: 234

The implications of September 11 all but guarantee a jump start next year on construction of the Baku-Tbilisi-Ceyhan (Turkey) oil export pipeline, backed by the United States. International oil companies active in Azerbaijan and Western governments behind them had, even prior to September 11, come close to a political consensus on proceeding with construction. That near-consensus came about mainly through American efforts, but did not take shape until British Petroleum-Amoco–leader of the Azerbaijan International Operating Company (AIOC)–dropped its earlier reservations which had held back the Baku-Ceyhan project.

Even so, doubts on and alternatives to Baku-Ceyhan continued permeating the debate, before rapidly receding in the aftermath of the terrorist assault and the American response to international terrorism. These events have thrown the security of Middle Eastern oil supplies into doubt, correspondingly increasing the urgency of bringing Caspian oil directly to Western markets.

The recently opened Tengiz (Kazakhstan)-Novorossiisk (Russia) oil pipeline does not answer the need for direct and unconstrained access. Its inauguration dramatized Russia’s head start in the contest over transit routes for Caspian oil and gas. The circumstances surrounding that inauguration showed how the Russian government can use its existing transit monopoly to impose inequitable terms on international companies.

That experience adds to the reasons that dictate a prompt start on construction of Baku-Tbilisi-Ceyhan. The Russian government has all along opposed this project in the hope of maintaining a quasi-monopoly on transit. In the wake of September 11, as a consequence of its rapprochement with the United States, the Russian government has at least outwardly softened its opposition, but has not indicated a real change of attitude. Moscow seems to be inching toward grudging acceptance of the inevitable implementation of this project by Western companies, Azerbaijan and Georgia.

On December 18 in Tbilisi and December 19 in Baku, AIOC chairman David Woodward reviewed the recent advances on the pipeline project with Presidents Eduard Shevardnadze and Haidar Aliev and the Georgian and Azerbaijani officials responsible for implementation. The phase of detailed engineering is moving toward successful completion. The Sponsor Group of companies is scheduled to become a consortium and secure funding for the pipeline in the first quarter of next year, in time for the scheduled start of construction work in mid-year. The 1,700 kilometer pipeline is scheduled to become operational by early 2005, at an initial throughput capacity of 28 million tons annually, to be at least doubled in the next phase through added compressor stations.

The pipeline will primarily be dedicated to oil from AIOC’s Azeri-Chirag-Guneshli offshore fields–the “contract of the century” project, valued at US$10 billion. AIOC’s and the Sponsor Group’s respective memberships are overlapping, but not identical. This situation redounds to the advantage of both groups because it ensures coordination in planning as well as flexibility in the choice of crude oil suppliers to the pipeline. While AIOC extracts western Caspian oil, the Sponsor Group’s current and prospective members include companies involved in eastern Caspian offshore fields, oil from which can increase the overall volume available for the Baku-Ceyhan pipeline.

AIOC’s current membership consists of BP as operator with a 34.1 percent interest, the American companies UNOCAL and Exxon/Mobil with 10.3 percent and 8 percent stakes, respectively, Azerbaijan’s State Oil Company with 10 percent, Russia’s Lukoil with 10 percent, Norway’s Statoil with 8.6 percent, Turkish Petroleum with 6.7 percent, Devon Oil with 5.6 percent, Japan’s Itochu with 4 percent and the American-Saudi venture Delta Hess with 2.7 percent stakes, respectively.

The Sponsor Group as presently constituted includes BP as operator with a 25.4 percent interest, UNOCAL of the U.S. with 7.5 percent, Norway’s Statoil with 6.4 percent, Italy’s ENI with 5 percent, Turkish Petroleum with 5 percent, Japan’s Itochu with 3 percent, Britain’s Ramco with 1.5 percent, the U.S.-Saudi Delta Hess with 1.25 percent and Azerbaijan’s State Oil Company (SOCAR) retaining a 45 percent stake for the moment. SOCAR plans to reduce its stake to 15 percent, selling stakes of 10 to 15 percent each to new entrants. The American company ChevronTexaco seems on the verge of acquiring a stake of that magnitude from AIOC.

Companies in this group would favor the entry of Russia’s Lukoil for two main reasons: politically, as an inducement to the Russian government to come on board the Baku-Ceyhan project and, commercially, to ensure inputs of Lukoil-owned crude into Baku-Ceyhan. Currently, Lukoil pumps its own oil from the AIOC fields northward into Russia. The Sponsor Group, on the other hand, would welcome not only a reversal of that flow, but also inputs from Lukoil’s northern Caspian fields, on the Russian continental shelf, into the Baku-Ceyhan pipeline, once it becomes operational.

Of far greater significance, however, is the availability of oil from Kazakhstan for pumping through Baku-Ceyhan. Until recently, feasibility studies had indicated that the pipeline could not be commercially profitable, and thus not “bankable” in the first place, without massive inputs from of Kazakhstani oil. Updated calculations–by BP among others–then showed that Baku-Ceyhan would be commercially viable with Azerbaijani oil alone, but that added volumes of Kazakhstani oil would increase the pipeline’s profitability, and thus its attractiveness to investors.

ENI’s membership and ChevronTexaco’s prospective entry in the pipeline project substantially increases the chances for Kazakhstani oil inputs into Baku-Ceyhan. The two companies are active in Kazakhstan’s largest oilfields, with ChevronTexaco operating the Tengiz field and also holding a major stake in the Tengiz-Novorossiisk pipeline. ChevronTexaco and ENI publicly favor the proposal to route oil from Kazakhstan’s port of Aktau across the Caspian Sea to Baku for pumping to Ceyhan.

For their part, Russia and Iran oppose the construction of trans-Caspian pipelines. Russia, the Caspian basin’s largest polluter by far, adduces ecological pretexts for its opposition. Moscow’s position on trans-Caspian pipelines will provide one test of the bona-fides of its rapprochement with the West since September 11 (Roundup based on recent reporting by the Oil and Gas Journal, Dow Jones Newswires, The Financial Times, Caspian Business Report, Turan, December 2001; see the Monitor, May 21, October 2, November 15).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at, by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions