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Georgia: A small pawn in the Great Game
By Sergei Blagov

MOSCOW - As Georgia welcomes in a new president this week after the US-encouraged regime change in November - despite Russia's last-minute efforts to mediate between warring sides - Moscow and Washington appear to be on the verge of a micro-Cold War over the country. Subsequently, the Kremlin remains wary.

Russian President Vladimir Putin has made it clear that Moscow is concerned that Eduard Shevardnadze's resignation took place under "forceful pressure". Foreign Minister Igor Ivanov stated that the regime change was not entirely democratic.

Moscow and Tbilisi have been divided on a variety of issues, including the continued Russian military presence in Georgia and its breakaway republic of Abkhazia. However, tensions between Russia and Georgia have been seen in a wider context of the Great Game over lucrative transit routes for crude oil from untapped fields in Central Eurasia.

It has been understood that Georgia's continued status as a failed state would have disrupted the United States' plans for a new pipeline from the oil-rich Caspian Sea to the West. Therefore, a stronger leadership was needed to secure the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan's and Kazakhstan's Caspian oilfields through Georgia to Turkey's Mediterranean port of Ceyhan. The US$2.75 billion project is due to start pumping oil in 2005.

Georgia's apparent president-elect, US-trained lawyer Mikhail Saakashvili, has repeatedly pledged to prioritize the BTC despite maneuverings by some external forces. Last month, Avtandil Ioseliani, head of Georgia's Intelligence Department, warned that the BTC might be blown up by terrorists on Georgian soil. Yet the real issue in discussions over the BTC and other oil-transit routes seems to be the control over outflows of crude from the Caspian region, while Georgia per se remains of little significance.

Russia has been sending mixed signals about the BTC pipeline, raising questions about Moscow's strategy for the US-backed project. For instance, Russia's special Caspian envoy, Deputy Foreign Minister Viktor Kalyuzhny, stated earlier that he "personally, as a Russian citizen, is against the construction of this pipeline". Kalyuzhny and other Russian officials have argued that Baku-Ceyhan is not "economically viable", yet they carefully refrained from attacking the BTC, for political reasons.

Russia's stated economic concerns over the BTC include questions about whether the pipeline will attract enough oil to fill its capacity of 1 million barrels per day (b/d).

Meanwhile, Moscow rushed to build an alternative transit route. The Caspian Pipeline Consortium's (CPC) $2.5 billion, 1,500-kilometer line from the Tengiz oilfield in Kazakhstan to the Russian port of Novorossiisk on the Black Sea opened in 2001. Russia has the biggest share in the CPC pipeline, with a stake of 24 percent. The CPC crosses Russian territory and pays Russian transit fees.

The CPC's capacity is at present 600,000 b/d, and will eventually be expanded to 1.34 million b/d by 2015. The CPC indicated it would pose serious competition to the BTC concerning the export of crude from Kazakhstan. In December 2001, Kazakh officials created a working group to study the feasibility of exporting oil from the Kashagan oilfield through the CPC.

The BTC's capacity of 1 million b/d (50 million tons per annum) was designed largely on the premise that Kazakh oil would be part of the flow stream. If the CPC and other alternatives are implemented, Azerbaijan, Georgia and the US would be on the losing side, both strategically and economically. Kazakhstan's participation in the BTC remains uncertain as Astana is now seemingly leaning more strongly toward the alternative routes for exporting oil from the giant Kashagan field.

During the Organization for Security and Cooperation in Europe summit held in Istanbul in November 1999, Kazakh President Nursultan Nazarbayev signed a protocol pledging Kazakh oil for the BTC. Subsequently, Nazarbayev clarified that the protocol was meant merely to signify intention, since new oil deposits in Kazakhstan had not yet been confirmed.

That was before discovery of the giant Kashagan oilfield off the Kazakh coast in the northern Caspian. The discovery of oil in Kashagan East-1 by the Offshore Kazakhstan International Operating Co (OKIOC) in July 2000 heightened interest in Kazakh oil exports.

In late 2000, Nazarbayev raised the prospect of extending the BTC eastward to Aktau, a Kazakh seaport on the Caspian coast. In March 2001 Nazarbayev, reportedly under urging from the US, signed a memorandum of understanding (MoU) in Astana confirming Kazakhstan's intention to join the BTC. US officials hailed the document as a positive development for the east-west energy corridor long promoted by the United States.

Subsequently, Kazakhstan further distanced itself from the BTC. Kazakh officials "clarified" that Kazakhstan favored multiple routes, and that the BTC was only an option. Kazakh officials indicated their preference for multiple pipelines, at times hinting at the Iran route as one of their choices. In October 2000, Kazakhstan commissioned TotalFinaElf, a shareholder in the OKIOC, to study the feasibility of exporting Kashagan oil through Turkmenistan and Iran. Kazakhstan has also signed an MoU with the Kashagan consortium to study the feasibility of a sub-sea pipeline across the Caspian from Aktau to the Iranian border.

A trans-Caspian sub-sea pipeline connecting Kashagan to the BTC, while favored by the United States, currently stands little chance. Representatives of Kazakh oil companies told Azerbaijani officials in December 2001 that they would not participate in the construction of a sub-sea pipeline from Aktau to Baku, citing high-cost concerns. Russia and Iran are both strongly against such an underwater pipeline, purportedly on ecological grounds.

Moreover, Kazakh officials' support of the BTC has appeared half-hearted. For instance, Nazarbayev has stated that the "efficiency of the Baku-Ceyhan is not proven", echoing Moscow's argument. Last month, Yerzhan Utembayev, deputy head of the Kazakh presidential administration, stated that Kazakhstan would be able to supply crude for the BTC "no earlier than 2010 or even 2015".

Without Kazakh oil, and unless new Azerbaijani oil reserves are discovered in the near future, it is unlikely that the BTC will reach the planned 1 million b/d peak capacity.

Kashagan production is scheduled to start in 2005. One way to transport early oil is to use tankers and barges from Aktau to Baku. To facilitate this alternative, the United States has financed studies aimed at upgrading port facilities at Aktau and Dubendi, the latter a tiny port on the Absheron Peninsula in Azerbaijan.

Now, Kazakhstan is a mid-sized independent oil producer. The country pumped 303.6 million barrels (41.3 million tons) of crude oil from January-November 2003, or nearly 9 percent up on a year-on-year basis. Kazakhstan plans to more than triple oil output to about 3 million b/d by 2015.

Russia has been pressing Kazakhstan to sign a long-term agreement to transport its oil via the CPC. The deal could discourage Kazakhstan from using other routes, including the US-backed Baku-Ceyhan pipeline. Moscow has also urged Astana to upgrade the existing Atyrau-Samara oil pipeline's capacity from 17 million tons up to 25 million tons a year.

A compromise solution, splitting Kashagan's oil between the BTC and the CPC, is not out of the question. The transport of Kashagan crude, depending on reserves, could require construction of one or more pipelines, through Iran, Russia, Afghanistan and possibly China. With Kashagan reserves possibly as high as 10 billion to 12 billion barrels of oil, it may require several alternative pipelines. Hence a geo-strategic rivalry between US- and Russian-backed oil-transit routes seems set to continue in the Caspian region.

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Jan 7, 2004

Pipelineistan revisited
(Dec 25, '03)



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