PIPELINE -- BOTH THE OBJECTIVE AND THE MEANS TO REACH IT

Initiatives to ensure energy security and diversify transit routes for energy resources have recently acquired special prominence. In this and subsequent issues Region Plus presents its readers with a comprehensive analysis of the course of the "pipeline war" from various standpoints.

An intergovernmental agreement on the construction of the Burgas-Alexandroupolis oil pipeline was signed during the Russian-Bulgarian-Greek summit in Athens on 15 March. The pipeline is expected to be 285-km long and its throughput capacity will range between 35 and 50 million t of oil. The approximate cost of the project fluctuates between 800 million and 1 billion dollars.

With the aid of this project, Greece and Bulgaria hope to improve their oil supplies, receive transit payments, create new jobs and bolster their geopolitical clout in the Balkans. It is believed that Greece and Bulgaria (they each have a 24.5 per cent stake) will concede their shares to major oil companies which will provide guarantees of the long-term transit of significant volumes of oil through the pipeline. Russia, which holds a 51 per cent stake in the project, is interested in diversifying its oil supplies to the market and reducing dependence on the Turkish straits and the Belarusian route, which has become problematic of late. According to expert assessments, the use of this pipeline will enable Russian oil companies to reduce transport costs by at least a third, if not by half. Oil from Novorossiysk will be delivered to Bulgarian Burgas (these are shallow ports) by small tankers. However, mooring jetties in Alexandroupolis are capable of receiving tankers of high displacement, which makes viable the delivery of Russian oil not only to EU countries but also to the USA.

But the intergovernmental agreement, by itself, is not enough. The pipeline needs to be designed, its corridor engineered, transit fees agreed, land allocated and many other inevitable problems and disputes resolved. In the best-case scenario, the pipeline will be built and brought into service in mid-2009 at the earliest. Specialists think the pipeline is not too difficult from the technical standpoint and its participants can easily afford to finance it. The construction of the Burgas-Alexandroupolis oil pipeline could have taken place long ago. Until recently, however, the parties, Russia in particular, were making general statements and only now appear to be interested in getting down to business.

Foreign analysts point to several important incentives in this regard. Firstly, there has been a considerable increase in oil production in the Caspian basin and, secondly, it is impossible to ensure the delivery of additional hydrocarbon volumes using traditional routes and existing pipelines. Kazakhstan and Russia proper are consistently ramping up production in the northern Caspian. Analysts predict that the volume of oil and gas condensate produced here may triple over the next decade. However, it is becoming increasingly difficult to transport these growing hydrocarbons volumes through the narrow bottleneck of the Bosporus. Turkey, understandably concerned over the potential environmental threat to one of the world's biggest cities, Istanbul, is tightening tanker traffic rules. If weather conditions deteriorate, tankers loaded with oil and oil products have to stand by at the entrance to the Bosporus, which leads to significant losses for both forwarders and owners. It is obvious that it will be extremely difficult to push additional volumes of oil from the northern Caspian through the bottlenecked Black Sea straits, especially at a time when the alternative Baku-Tbilisi-Ceyhan (BTC) pipeline has emerged.

Built despite the sceptics and ill-wishers, this pipeline has proved to be a reliable and economical oil transportation option after less than a year in operation. In this connection, the board of directors of BTC Co, which manages the Baku-Tbilisi-Ceyhan oil pipeline, has recently decided to increase its throughput capacity from the current 620,000 barrels of oil a day to the designed capacity of 1 million barrels. At the same time, the company is looking into the possibility of increasing the volume of oil transit to 1.7 million barrels in the future. It is also worth noting that the efforts of Azerbaijan, Turkey and BP towards turning the BTC into the main Caspian energy transportation route are fully supported by Washington. 

Thus the Burgas-Alexandroupolis project appears to be Russia's response in this ongoing pipeline game. It is intended to boost the competitiveness of Russian supply in the struggle for the transit of Caspian oil to world markets. As a matter of fact, this is not a secret. Russian President Vladimir Putin openly said in a news conference: "The project (Burgas-Alexandroupolis) gives us the opportunity to consider the possibility of expanding Caspian energy transit through the territory of Russia." His remarks are supported by the head of Russian Transneft, Semen Vaynshtok: "The launch of Burgas-Alexandroupolis will help us make a decision on developing the capacity of the Caspian Pipeline Consortium (CPC)."  

Russian oil, even if delivered by the Burgas-Alexandroupolis pipeline, is unlikely to be able to compete with Azerbaijani oil in Mediterranean markets. Our Azeri Light is lighter and lower in sulphur. Most European countries, where stringent environmental standards are applied, prefer to pay more for higher quality Azerbaijani or Libyan oil than to buy cheaper and heavier Russian oil from the Urals. As a matter of fact, one of the reasons behind Azerbaijan's refusal to use the already existing Baku-Novorossiysk oil pipeline is that our oil is mixed in it with Russian and Kazakh oil, affecting its quality and price. And it is unprofitable for us, as exporters, to lose 6-8 dollars, and at times even more, on every ton of oil.

In reality, the Burgas-Alexandroupolis project impacts on Turkish and Ukrainian interests even more. At issue is not only the reduction of payments for the transit of tankers through the Black Sea straits. This is easily made up for by the lower environmental threat posed to Istanbul with its multimillion population. There is a more significant impact. It is common knowledge that the construction of a pipeline from the Black Sea port of Samsun to Ceyhan terminals was considered in parallel with the Burgas-Alexandroupolis route. Let's recall that Ceyhan already accommodates Azerbaijani and Iraqi pipelines. An extra line from Samsun could turn Ceyhan into a petroleum stock exchange of international proportions.

The construction of the Burgas-Alexandroupolis pipeline is also likely to deal a blow to the chances of engaging the Ukrainian Odessa-Brody pipeline in a northerly direction, so keenly desired by Kiev, with the prospect of linking this route to the Polish port of Gdansk. At the same time, it can not be ruled out that the oil flow from the Caspian basin may be so immense that there will be enough for the effective operation of all the routes in a mutually beneficial manner and much to the delight of the competing countries, companies and consumers.

The pipeline intrigue is not confined to the selection of oil transit routes alone. The rivalry unfolding over the transportation of Central Asian gas to European consumers is no less acute or intense. There is also a continuing struggle to diversify routes and limit Russia's monopoly. In this context, the Memorandum of Understanding on energy cooperation signed by Azerbaijani Foreign Minister Elmar Mammadyarov and US Secretary of State Condoleezza Rice on 22 March is worth noting. According to US Assistant Under Secretary of State Matthew Bryza, the parties have expressed their support for the "construction of a network of pipelines for the transportation of regional energy resources, natural gas in particular, to European markets". The document dwells upon an additional tributary of the Baku-Tbilisi-Erzurum gas pipeline to Greece and Italy and, much to the frustration of the Russian monopoly GazProm, expresses support for the construction of the trans-Caspian gas pipeline. Deputy Foreign Minister Araz Azimov, in Brussels to discuss issues of interaction with the EU and NATO, has said it is advisable for European consumers to diversify gas supplies to their market through the construction of the trans-Caspian pipeline.

In conclusion, let me outline a curious scenario. On 19 March 2007, as if to a special plan, Azerbaijani gas from Sah Deniz crossed the Georgian border through the Baku-Erzurum pipeline. On the same day, Iranian gas from the south started flowing to Armenia. Isn't this the clearest manifestation of pipeline rivalry both in the global and regional arenas?