Publication: Monitor Volume: 5 Issue: 63

The last nail seems to have been driven into the coffin of the Baku-Novorossiisk pipeline, not by its critics but by Russia itself. The Azerbaijan International Operating Company (AIOC, the multibillion oil consortium) and the State Oil Company of Azerbaijan (SOCAR) announced yesterday that the flow of their oil through the Baku-Novorossiisk pipeline has been stopped on the Russian side, for which Russia’s Transneft pipeline monopoly is legally and financially responsible.

Technically, the “temporary” closure was decided on March 28 by Chechen authorities, who control the section of the pipeline on their republic’s territory. But the Chechens are only trying to force Transneft to pay its arrears, in excess of US$100 million, for pipeline maintenance and security and overdue transit royalties to Djohar. Russia’s Fuel and Power Ministry, confirming the validity of Chechen complaints, blamed the Finance Ministry for failing to transfer the funds to Djohar (Turan, Itar-Tass, March 30).

According to Russian Finance Minister Mikhail Zadornov, the payment arrears are connected to last August’s financial crisis, when the value of the dollar climbed three times against the ruble. He said that while the amount of money allocated in the budget for transit fees for Chechnya was calculated in rubles, the payments were usually made to Djohar in dollars. This explains, he said, why the Chechen side has not received the full amount it is owed. Zadornov said that as soon as Prime Minister Yevgeny Primakov returns from Europe, he will be given documents to sign authorizing paying off this Moscow debt (NTV, March 30). The problem might be resolved and the “northern route” for Caspian oil reopened, given that both Moscow and Djohar have a strong interest in ensuring that Caspian oil is transported along this route, and not along the “western route” through Georgia. The Baku-Novorossiisk pipeline had experienced several stoppages in February due to unpaid transit fees, and to sabotage efforts aimed at siphoning off oil. Those interruptions forced AIOC and SOCAR to either slow down production or even to suspend it briefly, incurring financial losses in the process.

In the meantime, the Baku-Novorossiisk route–with its many problems–is rapidly turning from a nuisance into an irrelevancy, thanks to the imminent opening of the Baku-Supsa (Georgia) pipeline which circumvents Russia. The Baku-Novorossiisk line, with an annual throughput capacity of only 5 million tons, was, until now, the sole functioning pipeline out of Azerbaijan. The Russian government intensely promoted it as the main export route for Azerbaijani oil, hoping to expand its annual capacity to some 40 million tons with international financing; the recent experience with the line, however, has killed any such prospect. Russia’s internal chaos and the commissioning of the Baku-Supsa line, due next week, seem to have buried the Baku-Novorossiisk project.