Pipe Dreams
Pipeline politics are putting a dampener on trade in the Caucasus and Caspian Sea regions, with Russia and the US being the main culprits. War and regional conflicts are stalling plans to make use of the region's vast oil and gas revenues. Control over the region's oil and gas resources will become increasingly important to the Expanded European Union over decades to come, as developed fields run dry.
The Caucasus and Caspian Sea region, straddling the divide between Europe and Asia, may seem remote and far away, but in future years it will become increasingly important to Europe.

The region has vast oil and gas resources and contains six hydrocarbon basins. Proven oil reserves are estimated at between 16 and 32 million barrels (by comparison, the North Sea's reserves stand at 17 million barrels).

Furthermore, large parts of the Caspian region have not been surveyed in detail, so potential oil reserves could be ten times that figure.

The proven natural gas reserves in the region are even larger and have been estimated at between 236 and 337 thousand billion cubic feet - similar to the entire North American reserves.

Based on these proven reserves alone, the countries bordering the eastern Caspian Sea - Kazakhstan, Turkmenistan, and Uzbekistan - rank among the world's 20 largest natural gas countries. The unproven reserves could be as much again.

However, in the past decade, the region has become a victim of an international game of pipeline politics, the main players being not the EU, which in its expanded form has much to gain from cheap Caspian gas, but Russia and the US.

It has been dubbed the New Great Game, in reference to the Great Game played out by the UK and Russia in the early 20th Century. The region is racked by civil strife. In Chechnya, the Russians are facing a protracted guerrilla war, the long-running dispute between Armenia and Azerbaijan is far from settled, and in Georgia there are simmering disputes between the government and two ethnic Armenian provinces.

The unseen hand behind much of the region's conflict has been Russian. It has been a policy of destabilization. There are powerful interests in Moscow that want to make sure that the primary route for export of oil and gas is Russian, thus controlling the west's access to the Caspian's vast energy reserves.

The area's gas fields were well developed during the Soviet era, but the somewhat shaky economies of the new republics have led to a collapse in the market. There are ready-made markets in Europe and China, but the problem is getting the oil and gas out of the region.

Gazprom, the Russian gas company, controls virtually all the export pipelines and regards Caspian gas as a competitor. For the west, giving Russia control over such strategically important resources is a big no.

The alternatives to exporting gas through the Russian pipelines are to construct new lines through Afghanistan, considered too unstable, through Iran, still blacklisted by the US, or by building long and expensive new pipelines.

The solution favoured by the US has been to devise new pipeline routes, which bypass Russia. Officially the US sees the planned 'pinwheel' of oil and gas pipelines as laying a foundation for stability and reform in central Asia. In practice it wants to see the influence of Russia and Iran curtailed in the region, although its hard line against Iran has softened in recent months.

In December 1998, at an international conference on Caspian energy, it mapped out its intentions for the region. It became clear to many delegates at the conference that the US government was attempting to play a complex game of pipeline politics, determining which pipeline projects would succeed on the basis of its own strategic objectives. It was clear the US did not want oil or gas flowing through Russia or Iran; rather it wanted the pipelines to cross so-called friendly states.

This policy, which has repercussions for European integration, was spelt out in March 1999 for the benefit of the Senate subcommittee on international economic policy, exports and trade promotion.

Richard Morningstar, special advisor to the president, told the committee: 'The fundamental objective of US policy in the Caspian is not simply to build oil and gas pipelines. Rather it is to use those pipelines as tools for advancing the sovereignty and independence of the new independent states and for establishing a political and economic framework that will strengthen regional co-operation and stability and encourage reform for the next several decades.'

He added that to successfully pursue its diplomatic goals, the administration needed to strengthen its ties with Azerbaijan, on the western shore of the Caspian.

The US is backing five pipelines in the Caspian region, but the most significant is the one from Baku, the capital of Azerbaijan, across Georgia, to Ceyhan, a deep-water port on Turkey's Mediterranean coast. The 2,000- mile Baku-Ceyhan pipeline is expected to cost more than US$3 billion (E3.ll billion) and is expected to be ready in 2004.

The pipeline route has not pleased the Bulgarians, who were desperate for the foreign exchange income the transit fees would have brought. An agreement, the Ankara Declaration, between Turkey, Azerbaijan, Georgia, Kazakhstan and Uzbekistan, on the pipelines has been signed.

Significantly, US energy secretary of state Bill Richardson also signed as an observer. To kick the whole thing off, Turkey has signed a preliminary gas purchase agreement with Turkmenistan for 16 billion cubic meters a year.

However, there are weaknesses in the US strategy. Observers have pointed out that Azerbaijan and Georgia's ongoing ethnic conflicts, exacerbated by Russia, could at any time boil over and affect the pipeline route.

There are also complex economic factors at work, which have been skilfully played out by the new Russian leader, Vladimir Putin. For example, in oil-rich Azerbaijan, an on- going shortage of fuel oil for power stations has led to an agreement to import 2bcm of gas from Russia, Turkmenistan and Iran. The shortage has been caused in part by an agreement signed in 1994 with Russia to export a set amount of oil through a new pipeline running to the Russian Black Sea port of Novorossick.

This pipeline ran across the breakaway republic of Chechnya, and battle for control of the pipeline partly explains the heavy-handed and brutal way in which the Russians have handled the Chechen war.

While the war in Chechnya was ongoing, the agreement between Azerbaijan and Russia was unenforceable, as the section of pipeline in Chechnya was often sabotaged and unusable.

The Russians got around the problem by building a pipeline bypassing the territory, with the result that Azerbaijan is contractually obliged to fulfil its part of the deal. The Russian pipeline operator Transneft still owes Chechnya $5.5 million in transit fees.

To complicate the picture, Lukoil, which has a share of Azeri oil, has stated that it plans to export its share via the Russian pipeline and not through the new Baku-Ceyhan line, thus throwing into doubt the economics of the US- backed project.

Such manoeuvrings are typical, and may become more common as Russia switches to economic rather than military ways of playing the New Great Game.

Chechnya has estimated oil reserves of 500,000 tonnes. The capital Grozny lies on a major oil reservoir situated just 6 or 7 metres below the ground surface.

The refinery in Grozny was one of the largest in the former Soviet Union, producing 1.5 million barrels a day. In 1999 an independent oil consultant, Glen Howard, visited Chechnya as part of a human rights delegation, to assess the damage caused to the infrastructure. The Chechen minister of petroleum, Alkhazur Abdul- karimov, estimated that the war had caused well over $100 million in damage to oil installations. More than 130 oil wells were on fire by the end of the first Chechen war in 1997, and the government had only managed to put out 40. Now, after the fall of Grozny, the situation is probably much worse.

Not surprisingly it was Chechnya's oil resource, which, in 1998, President Maskhadov's government pinned hopes on for attracting investment from the west, to pay for the war and reconstruction of the country. However, attempts by the Chechens to attract inward investment were derailed by the kidnappings of oil workers, and the brutal killing of four western telecom engineers, whose bodies were found decapitated.

There are many theories as to who was behind the kidnappings, but the one gathering favour among regional analysts is that the kidnappings had the tacit approval of the Russians, with the intention of putting off western companies from investing in the area. The kidnappings happened at a particularly significant time for the Chechens. President Maskhadov had visited the UK, along with businessman Khozh Ahmed Noukhaev, an important intermediary for the Chechens.

But regardless of whether the Russians were behind the kidnappings, the outcome has been the same. Western oil and gas companies remain reluctant to invest in Chechnya, which, despite Russian successes, has no security. The Chechens are likely to continue their war of independence with increased fervour, because they have attracted Moslem fundamentalists who are prepared to die for their cause.

The west is keen to follow a policy of appeasement with Russia. The UK has put great emphasis on the trading relationship at the expense of the human rights atrocities committed in Chechnya.

However, regional uncertainties persist. A dispute over Caspian Sea sector boundaries could also be looming. In one instance, both Russia and Kazakhstan lay claim to an island with an area of just 1,200m2, which may sit on reserves of 100 million tonnes of crude oil.

And this year the Kazakh government has been grappling with western tax havens. It has ordered an investigation into last year's huge increase in 'paper' exports of Kazakh oil to Bermuda and the Virgin Islands.

The EU Directive on liberalising the gas market is also expected to have repercussions in the Caspian region. By encouraging open trading and spot market sales and reducing the number of large interstate deals Gazprom is worried that European prices will fall, and has suggested that this will affect its ability to pay for gas from Turkmenistan. It may also affect fledgling -plans by Azerbaijan to develop its gas fields.

All in all, despite enormous attempts by the west to stabilise and control the region's energy economy, it remains as volatile as ever. War and vested interests could mean that plans for a pinwheel of pipelines to serve the region could remain just a pipe dream. EC

A version of this story was first published in July 2000 by Utility Europe magazine.

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US Advisor: Richard Morningstar.
It has been dubbed the New Great Game, in reference to the Great Game played out by the UK and Russia in the early 20th Century. At stake then were the geopolitical interests of the British Empire. At stake now is control over the region's oil and gas resources.
"The fundamental objective of US policy in the Caspian is... to use those pipelines as tools for advancing the sovereignty and independence of the new independent states."
- Morningstar
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