SECURITY UNDER CONTROL

The Russo-Georgian conflict has shown what a negative impact political conflict can have on regional economic projects. Despite assurances of complete security and state guarantees from the participating countries, the pipelines connecting Azerbaijan, Georgia and Turkey stopped working for several days in August.  

The first time this happened was overnight on 5-6 August in Turkey when an explosion occurred at a pumping station in the Erzincan-Refahiye sector of the Baku - Tbilisi - Ceyhan main export pipeline (BTC). The transport of Azerbaijani oil through the pipeline was stopped in order to prevent the fire spreading. Later, the export of Azerbaijani oil and gas via the Baku - Supsa oil pipeline and Baku - Tbilisi - Erzurum gas pipeline (the South Caucasian Pipeline - SCP) was stopped by foreign subcontractors because of the Georgian-Ossetian military conflict. Azerbaijan later stopped exporting oil via the ports in western Georgia after a major railway bridge leading to the Black Sea ports was damaged by an explosion on 16 August. 

Million-dollar standstill

What are the implications of a reduction or complete halt in Azerbaijan's exports of black gold? Azerbaijani Economic Development Minister Heydar Babayev says that GDP growth in the country is today linked directly to oil. 

But the minister hoped that the process would be brief and GDP forecasts would remain at their previous level. 

The standstill on the BTC system in Turkey is costing Azerbaijan (i.e. the State Oil Company and State Oil Fund of Azerbaijan) $50-70 million per day in direct revenue, taking into account July's average daily throughput of 870,000 barrels of Azerbaijani oil but disregarding taxes, tariffs and additional payments, according to experts from the oil consultancy Caspian Energy Alliance. 

The calculations were made for the short term taking into account only Azerbaijan's current share in the PSA (production sharing agreement) on the Azari-Ciraq-Gunasli block of oil fields.  The Azerbaijan International Operating Company (AIOC), which is carrying out the full field development of the ACG in the Azerbaijani sector of the Caspian, reduced extraction because of the pipeline fire and stopped exports. The company is not saying to what extent extraction has been reduced. After BTC shut down the AIOC used different routes to export their oil - the Baku - Supsa and Baku - Novorossiysk pipelines, which are operated today by SOCAR, and the Baku - Batumi railway. BTC had the capacity to pump one million barrels of oil per day and the alternative routes are not able to make up that shortfall completely. The company, therefore, cut back on extraction at ACG to regulate oil storage capacity at Sanqacal terminal. We can talk about an 80-per-cent drop in extraction at Azerbaijan's strategic oil fields since the maximum throughput capacity of the Baku - Novorossiysk and Baku - Supsa pipelines does not exceed 15 per cent of the BTC capacity and the overall capacity of all the operating terminals of Azerbaijan and the AIOC is equivalent to no more than two days of exports via BTC, also taking into account rail export. Just a few days after the halt in oil transport through BTC, Azerbaijan and the foreign participants in the projects to explore and exploit Azerbaijan's offshore fields had suffered economic losses of around $500 million. 

The economists and analysts at the Fitch Ratings international ratings agency have also made their calculations. They think that every month that BTC stands idle costs BP approximately $300 million without taking into account income from transport tariffs. By the end of 2008 Azerbaijan's share in the ACG consortium's profit oil will go up to 80 per cent and a large part of the money coming into the State Oil Fund this year (more than 90 per cent) is expected to come from the sale of profit oil.

Moreover, the export of Kazakh oil was redirected from Batumi maritime port to the internal market on 11 August because of events in Georgia, even though no hostilities had been waged against the port of Batumi and the oil terminal on that day. On the orders of the military administration all cargo ships and tankers were taken out of the port's waters. 

Baku and Astana were forced to stop the export of oil via the ports of Poti, Batumi and Kulevi. Analysts calculate that the transit of oil could be reduced by the equivalent of 1.6 million barrels of oil per day as a result of the Georgian-Ossetian conflict. In money terms this is around $170 million per day.  

Caspian Energy Alliance experts forecast that once the Russo-Georgian conflict has stabilized, Kazakhstan, Turkmenistan and Azerbaijan will need time and significant political and diplomatic effort to move the negotiating process forward on creating a trans-Caspian export system. 

Fitch Ratings says international oil and gas players may be forced into spending additional unforeseen amounts on ensuring that their infrastructure assets are adequately protected "as terrorist attacks become bolder, more frequent and more severe". The Fitch Ratings report says that BP plc, Royal Dutch Shell plc, Total SA and Gazprom OAO have suffered attacks on their infrastructure in recent years which have caused economic losses, but these attacks have not had a significant impact on the companies' creditworthiness to date.  

"If such attacks continue to increase in frequency and intensity, operators will eventually reach a point where the present value of increased security costs of key production and transportation infrastructure will be lower than the present value of lost earnings," says Jeffrey Woodruff, a senior director in Fitch's Energy, Utilities & Regulation team. "The costs can go beyond the immediate monetary loss that results from the disruption following an attack. If off-takers begin to feel their source of supply from a particular project is continually threatened or vulnerable, they may seek to take their business elsewhere."

"Security is observed"

To be fair, we should say that in November 2007 BP and the Azerbaijani government signed a bilateral protocol on ensuring the security of BP's projects in Azerbaijan. Specifically, it covers security issues at sites and installations that form part of the BTC and SCP projects and Baku -Novorossiysk and also installations that have been built as part of the Shah Daniz and ACG projects and Sanqacal terminal. The security protocol set out procedures and standards on the use of force and firearms, the employment and training of security service personnel and also on the exchange of information and consultation and monitoring that commitments have been upheld. The document did not aim to tighten preventive measures to protect any oil and gas installations, including oil and gas pipelines, and was not linked at all to any security threats or anything else, other than to the need for the document to be agreed on the basis of mutual obligations earlier undertaken by the sides. BP Vice-President Rasid Cavansir said then that the document does not imply an expansion in the powers of the company. He said that responsibility for the security of sites, including the BTC and SCP, was born exclusively by the states through which these pipelines pass. "The protocol does not concern the direct security of the pipelines," Rashid Cavanshir said. "It declares that the people who ensure the security of the pipelines will not use methods that directly or indirectly restrict the rights of citizens living along the oil and gas transit routes. The protocol has nothing to do with ensuring physical security and regulates how security work should be carried out - that is, the forces that ensure this security must have special training on ensuring human rights in the process of performing their duties. This work is under way in Azerbaijan, Georgia and Turkey and involves employees of the power-wielding ministries, border services, etc." 

The head of BP-Azerbaijan's press service, Tamam Bayatli, told R+ that "all the necessary BTC security norms are being observed in Azerbaijan, Georgia and Turkey".

"The Turkish sector of BTC is managed by Botas International Ltd, while the Turkish state ensures the security of the pipeline. The same applies to Azerbaijan and Georgia, that is, the security of the pipelines is the direct responsibility of these countries," Tamam Bayatli said. 

It is no secret that BTC is the second longest pipeline in the world - it is 1,760 km long and has eight pumping stations and 101 block valve stations. It crosses difficult and dangerous territory. The route passes through inhospitable mountains, desolate landscapes and 14 seismically dangerous faults. 

It is wholly understandable that, faced with many potential threats, the consortium is taking tough security measures. Despite the serious infrastructure on the surface - for example, the block valve stations that change the direction of the oil flow - the pipe itself is buried at least one metre underground for almost the entire route. When the land is returned to its owners, it must look exactly as it did before the construction, which makes it more difficult for potential saboteurs to determine the pipe's exact location. Major overground constructions, such as pumping stations, are carefully guarded: security measures vary from blast-proof walls to constant observation cameras and armed guards. The pipeline route is strictly monitored and patrolled. Transmitters located along the pipeline allow the location of damage to be pinpointed quickly on a computerized map. Moreover, the agreement between the BTC consortium and the Azerbaijani, Georgian and Turkish authorities simplifies patrolling. Georgia has gone even further, signing a bilateral agreement with BP on additional security measures. BP is constantly sending guards to check the overground installations and the company hires local residents for patrols on horseback. In addition the company is carrying out a broad programme to support relations with the local community, seeking mutual understanding with the people living along the route. These residents are the first line of defence of the pipeline and can warn of any suspicious activity. The agreement also envisages patrols of the pipeline route by units of the new Georgian Strategic Pipeline Protection Service, equipped, trained and financed by BP.

The same goes for the Baku - Supsa oil pipeline. There have been no serious incidents the entire time the pipeline has been in operation, not including some attempts at illegal incisions into the pipe. Overall, the special forces involved provide adequate protection - military exercises are held regularly and various events take place which heighten security. Test runs of various scenarios are held on the route to ensure the security of the export pipelines and scenarios for potential terrorist attacks and ways to avert and liquidate the attacks are analysed. 

Internationally important project

They have often wanted to accuse Georgia of being unable to ensure the safe operation of the pipelines crossing its territory in an attempt to dampen the interest of foreign investors in such important export projects. To be fair we must say that Georgian government representatives have often discussed with major foreign powers - the USA, Japan - international cooperation to ensure the security of the oil and gas pipelines crossing Georgia. Protecting the oil and gas pipelines through Georgia and ensuring their uninterrupted operation has long since become an international affair. 

"Caspian oil can be shipped from Ceyhan to any port in the world, so international interest in the security of the pipeline is wholly understandable. Georgian President Mikheil Saаkashvilii recently described Azerbaijan as the guarantor of Georgia's sovereignty," a Georgian expert told R+.

 He said that there are a wealth of ways to tighten the security of the pipelines' operation: from staff training and creating mobile groups to setting up a single command for the guards in Azerbaijan, Georgia and Turkey; from analysing attacks on pipelines in different countries to using satellites to monitor the length of the pipelines from Baku to Ceyhan and Erzurum. "I very much doubt that financial resources will be given grudgingly to protect such important export routes for hydrocarbons when they cost almost $7 billion. Neither Azerbaijan nor Georgia has been nor will be left on their own to tackle the difficult job of ensuring the security of the pipelines on their territory," the expert said. 

Everything that has been said about Azerbaijan and Georgia applies to Turkey, the destination for the oil and gas pumped through the pipelines, although "the situation in Turkey with regard to protecting the pipelines is much better", the expert said.

The head of Azerbaijan's Centre for Economic and Political Research, Sabit Bagirov, told R+ that he was sure that pumping of Azerbaijani oil through BTC would "definitely resume". 

"The early days of the Georgian-Ossetian conflict were very stressful for everyone, including for the companies, and the prevailing situation in Georgia is making investors think about risks, which is understandable. However, I think that this is temporary. We have all seen that the situation in Georgia has reached a peaceful stage and several countries, first of all France, have mediated to resolve the conflict. This must give investors some confidence," Sabit Bagirov said.  

The BTC oil transport project is of international, not local significance, according to the experts consulted by R+. Ninety nine per cent of Caspian oil goes to Western markets, not including Israel. So any enforced shutdown of the pipeline is a real blow to the Western market. A disruption in supplies via BTC disadvantages not only Azerbaijan, Georgia and Turkey but also the West that needs supplies of crude oil.

BP Vice-President Andrew Inglis visited Baku in connection with the events in Georgia and was received by Azerbaijani President Ilham Aliyev. Andrew Inglis said that the company had been forced to cut back oil extraction from its contract area in Azerbaijan because of the latest events in Georgia. At the same time it is trying to minimize losses from this for the State Oil Fund of Azerbaijan. Andrew Inglis promised to meet BP's obligations to supply gas to the country in the winter period.  

President Ilham Aliyev said for his part that all this shows that Azerbaijan and BP can cooperate successfully "even in crisis situations". The head of state said he was certain that "the further expansion of cooperation with BP will create a good foundation for the implementation of the planned projects". 

P.S. On 20 August the BTC pipeline company began testing the BTC section in Turkey damaged by the explosion. The tests were carried out to normalize the export of Azerbaijani oil to the port of Ceyhan. Between 6 and 20 August potential importers suffered a shortfall of up to 14.48 million barrels of Azerbaijani oil.