Publication: Monitor Volume: 6 Issue: 200

On October 17 in Baku, October 18 in Tbilisi and October 19 in Ankara, a long-awaited set of agreements which bring the start of construction work on the oil export pipeline to Ceyhan (Turkey) within sight was signed. The interested companies have joined in a Sponsor Group to commission and finance engineering work on the project. The group consists of Azerbaijan’s State Oil Company (SOCAR), British Petroleum Amoco, Unocal of the United States, Statoil of Norway, Itochu of Japan, Turkish Petroleum, Ramco of Britain, and Delta Hess–a partnership of Delta Oil of Saudi Arabia with Amerada Hess of the United States. The main shareholders are SOCAR with 50 percent–some of it to be apportioned to current or potential group members–and BP Amoco with 25.41 percent.

The Sponsor Group’s membership overlaps with that of the Azerbaijan International Operating Company (AIOC) which develops the Azeri-Chirag-Guneshli offshore oilfields, at a cost of US$10 billion in investment commitments which do not include the cost of the main export pipeline. Cost estimates for the Baku-Tbilisi-Ceyhan pipeline range upward of US$2.4 billion. BP Amoco is the operator of AIOC and could play a preeminent role in the Sponsor Group as well. AIOC member ExxonMobil, however, has declined to join the Sponsor Group and publicly expressed doubts about the commercial profitability of the Baku-Tbilisi-Ceyhan route. That position, in essence, continues the pre-merger Mobil policy, a company which had for years advocated an Iranian route for Caspian oil exports. AIOC’s member LUKoil has also declined to join the Sponsor Group, presumably on a cue from the Russian government.

The Sponsor Group’s immediate goal is to launch technical work on the pipeline in two phases: basic engineering at a cost of US$25 million over an eight-month period starting in November 2000, to be followed by detailed engineering at a cost of US$120 million over an eleven-month period, leading directly to the start of construction work by mid-2002, to be completed by 2004.

The documents signed in Baku and Tbilisi include host country agreements between the companies and the Azerbaijani and Georgian governments, respectively. The agreements signed in Ankara add tax breaks and other incentives to investors in the project, a turnkey agreement with Botas, and Turkish government guarantees to absorb hypothetical cost overruns.

In parallel, the Sponsor Group will negotiate the formation of a Main Export Pipeline Company (MEPCO) which will finance, construct and operate the pipeline on the territories of Azerbaijan and Georgia. The Turkish state company Botas will be in charge of the pipeline’s section on Turkey’s territory. Botas has already initiated the engineering work there. The pipeline’s total length will be 1,730 kilometers [1,075 miles], its throughput capacity 50 million tons annually, the transit charges US$18 per ton (2.58 per barrel), and its operating lifetime a minimum of thirty years. The formation of the Sponsor Group and of MEPCO should pave the way toward an international credit package for the project.

Beyond its economic significance, the project could advance Azerbaijan and Georgia’s independence from Russia to the point of irreversibility, anchor them politically to the Western world, launch them on the path to modernization and consolidate the group of pro-Western countries in an area stretching from the Black Sea to the Middle East, with Turkey as pivot of that group. Those considerations have inspired Russian and Iranian resistance to the Baku-Tbilisi-Ceyhan project. As Presidents Haidar Aliev and Eduard Shevardnadze remarked during the signing proceedings, the event signified a victory over those “external forces” which had sought to stop the project in its tracks.

The United States government used the occasion to encourage oil producers in the eastern Caspian basin–that is, Kazakhstan, Turkmenistan and the Western companies active there–to join the Sponsor Group and then the MEPCO. An early commitment of eastern Caspian oil volumes to this pipeline would maximize its profitability and attractiveness to investors. But Washington’s hortatory appeals and consulting service offers may prove insufficient unless the U.S. government finds ways to offset some of the project’s costs. Its strategic significance–which Washington itself has eloquently highlighted–would justify a higher level of financial commitment than the Clinton administration has been prepared to offer these past four years (ANS, Baku Sun, Prime-News, Anatolia news agency, The Turkish Daily News, Dow Jones Newswires, October 17-24; see the Monitor, September 25, October 13; Fortnight in Review, October 6).