Publication: Eurasia Daily Monitor Volume: 5 Issue: 155

With Western eyes fixed on the clash between Russia and Georgia over the disputed enclaves of South Ossetia and Abkhazia, the conflict is affecting neighboring countries’ oil shipments, particularly Azerbaijan and transit nation Turkey.

There was a terrorist attack on August 5, two days before the outbreak of hostilities between Georgia and Russia, by the Kurdish separatist Partiya Karkeren Kurdistan (Kurdistan Workers’ Party) on the Baku-Tbilisi-Ceyhan (BTC) pipeline. The $3.6 billion, 1,092-mile, one million barrel per day (bpd) pipeline transits high-quality Azeri crude from its Caspian offshore Azeri-Chirag-Guneshli fields to Turkey’s deepwater Mediterranean terminus at Ceyhan. The assault caused BTC’s operator BP (formerly British Petroleum) to declare force majeure and halt shipments as authorities waited for the affected section to burn itself out. Now the conflict over South Ossetia and Abkhazia has effectively halted alternative Azeri-Georgian transit routes, including the recently reopened 550-mile Baku-Supsa line, opened in 1999, as well as maritime oil exports from the Georgian Black Sea ports of Poti, Batumi and Kulevi.

The closure of BTC is costing Turkey $300,000 a day in lost transit revenue until repairs are completed in one or two weeks. Since the line became operational in May 2006, Turkey has received $2.6 billion in transit fees, but the explosion has caused the port to deplete its stockpiled oil (Hurriyet, August 12). Georgian Security Council Secretary Aleksandr (Kakha) Lomaia stated that, “Russians bombed the BTC pipeline south of the city of Rustavi,” but the charges were denied by the Russian military (Ekho Moskvy, August 9; SAPA-AFP, August 12). More than 155 miles of the BTC transits Georgia, with the pipeline in places running as close as 34 miles from South Ossetia.

The loss of transit revenues is a blow to Ankara, which viewed the BTC revenue as partial compensation for supporting United Nations sanctions imposed on Iraq following Operation Desert Storm in 1991. During the sanctions prior to the outbreak of the U.S.-led war against Iraq in March 2003, Turkey estimated that it had lost $80 billion in transit revenue from Iraqi oil exports to Ceyhan via the Kirkuk-Ceyhan pipeline as well as from other trade with Iraq.

For Tbilisi, the revenue losses from BTC’s closure are also significant. In 2007 BTC fees generated $25.4 million in transit revenues and Saakashvili’s government estimated transit payments for 2008 at about $45 million (www.investingeorgia.org).

Seeking an alternative route, BP switched to the recently reopened 550-mile 140,000- bpd Western Route Export Pipeline (WREP), better known as the Baku-Supsa line, which opened in 1999 and was running at about 90,000 bpd. On August 12 BP announced that it was suspending shipments through Baku-Supsa, as well as the South Caucasus Pipeline (SCP), which transports natural gas from Baku to Turkey via Tbilisi (Oil & Gas Journal, August 12).

Completing the lock-in of Azeri westward oil exports, the fighting caused authorities to suspend seaborne shipments from Batumi (200,000 bpd) and Poti (100,000 bpd), both supplied by rail.(Informatsionnoe agentstvo Regnum, August 11). Poti was closed on August 8 following reported Russian air strikes. Adding to the grim picture, the fighting also closed exports from Kulevi, Georgia’s third Black Sea oil terminus, which opened last year and is capable of shipping 200,000 bpd. On August 12 Lomaia stated, “The Russian military is posing a direct threat to the Kulevi oil terminal, the property of the Azerbaijani oil company SOCAR (State Oil Company of the Azerbaijani Republic). They have demanded that the terminal staff evacuate as Russians are preparing to bomb the nearby forest, claiming that Georgian troops are hidden there. The president of Azerbaijan, Mr. [Ilham] Aliyev, is currently trying to convince the Russian leadership to prevent this barbaric act from happening” (Agence France Presse, August 12).

In a fiscal bonanza for Moscow, BP resumed sending Azeri crude northwards through Transneft’s Baku-Novorossiysk pipeline, which Azerbaijan had quit using following the BTC becoming operational in May 2006 (Gazeta, August 12).

While Turkey is suffering revenue losses from the BTC closure, Georgian maritime oil exports via the Turkish Straits bring Ankara no revenue, as under the terms of the 1936 Montreux Convention, it is barred from collecting transit fees. The conflict does threaten Turkish-Georgian trade, however, which reached $1 billion last year. Quite aside from concerns about restoring tranquility in the Caucasus, Turkey has deep fiscal concerns impelling it to seek a quick end to the conflict. On August 11 Georgian President Mikheil Saakashvili telephoned Turkish Prime Minister Recep Tayyip Erdogan seeking his assistance in ending the clash (Hurriyet, August 12). The same day Erdogan spoke with UN Secretary-General Ban Ki-moon to discuss the armed confrontation, urging the UN to take initiatives to end the clash and restore peace and stability to the Caucasus (Sabah, August 12). Erdogan also proposed establishing a Caucasus alliance to ensure peace and stability in the region. It would include Caucasian nations along with the United States, the EU and Russia. “Turkey is ready to play a key role in making this alliance a reality. But this idea needs to be discussed under UN auspices to become practicable,” he said.

While the underlying causes and subsequent military operations in South Ossetia will preoccupy foreign affairs ministries for the foreseeable future, the long-term impact of the crisis is to throw into sharp relief the West’s assumptions about the expediency of using Georgian territory for oil and natural gas projects without taking Moscow’s views into consideration. Over the last decade BP and its partners have invested $5 billion to develop the BTC pipeline, the Baku-Supsa pipeline and the South Caucasus gas Pipeline (SCP), completed in 2006, to carry natural gas from Azerbaijan’s offshore Caspian Shah Deniz field. Quite aside from diplomatic concerns, for Turkey, which imports 90 percent of its energy needs and 65 percent of its natural gas from Gazprom, the sooner the dispute is resolved the better, so it can begin again to collect transit revenues to pay Moscow’s ever-rising energy bills.