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BTC spurs co-operation

Completion of a new oil pipeline linking Baku with the Turkish Mediterranean has provided Azerbaijan with a route to western markets that will guarantee the republic a future as a Caspian export hub even after its own production enters decline, writes Isabel Gorst

The presidents of Azerbaijan, Georgia and Turkey attended the inauguration of the Baku-Tbilisi-Ceyhan (BTC) pipeline on 25 May at the Sangachal terminal near the Azerbaijani capital, Baku. US Energy Secretary Samuel Bodman was also there, demonstrating Washington's support for the export route, which bypasses Iran and Russia. The filling of the 1m barrels a day (b/d) pipeline began a few weeks earlier and will take about six months to complete. The first tankers should load at the Turkish Mediterranean port of Ceyhan before the end of the year.

BTC will bring a new source of non-Middle East oil to European markets. The line will also relieve congestion in the Bosporus created by fast-growing Russian and Caspian crude exports from the Black Sea.

Construction of the 1,770 km pipeline was a "huge engineering achievement", David Woodward, president of BP Azerbaijan told the 12th International Caspian Oil and Gas Conference in Baku, in June. The line crosses mountains 3,000 metres high, 1,500 rivers and seven fault zones. At Ceyhan, a 7m barrel oil-storage terminal has been built and two tankers will be able to load simultaneously from a 2 km jetty.

The pipeline cost $3.4bn to build, two thirds of which has been provided by multilateral lending agencies, including the European Bank for Reconstruction and Development, the International Finance Corporation – the private-sector lending arm of the World Bank – and various banks.

BP is operator both of the consortium that built and owns BTC and of Azerbaijan International Operating Company (AIOC), which is developing the fields in the Azerbaijani sector of the Caspian Sea that will be the main source of throughputs. Output from AIOC's early development at the Chirag field has been flowing for some years. This spring, AIOC started operations at a platform at Central Azeri, which is yielding 150,000 b/d. Output will build to 400,000 b/d.

Production building

AIOC is developing the West Azeri and East Azeri fields, which are due on stream in 2006 and 2007 respectively. A platform installed in deep-water sections of the Guneshli field – also licensed to the consortium – will begin producing in 2008. By this time, Azeri's total output will have peaked at 1m b/d and some $14bn will have been spent on the project.

AIOC's Azeri fields were discovered during the Soviet era, but despite active exploration in the southern Caspian by foreign majors since the mid-1990s, there have been no large oil discoveries.

At its peak, Azeri will produce enough oil to fill BTC. But more shippers are needed to guarantee a longer life and greater profitability for the pipeline. As a result, Azerbaijan is negotiating a government-to-government contract with Kazakhstan that would provide a legal framework for Kazakhstani crude to be transported through the pipeline. It had been hoped that the accord might be signed on 25 May, when Kazakhstan's President Nursultan Nazarbayev attended BTC's inauguration, but progress in reaching an agreement is slow.

Kazakhstan's crude exports will surge after 2007, when the 7.3bn-8.8bn barrel Kashagan field comes on stream in the north Caspian. Existing export lines out of the republic are full and partners in the Agip-led consortium developing Kashagan are hunting for routes to market.

Woodward expects an agreement to be signed soon. "You need a group of companies with a definite resource and a development under way, then it will all happen."

Kazakhstan's policy is to diversify its export routes. But, for now, all export pipelines out of the republic run through Russia. A new crude pipeline from central Kazakhstan to China is being built. But initial capacity will be limited to just 200,000 b/d.

It is possible Kazakhstan's producers may start shipping oil through BTC before the government-to-government agreement is reached with Azerbaijan. But they are unlikely to make the major infrastructure investments that large-scale exports would require until the agreement is in place. Construction of terminals on the Kazakhstani and Azerbaijani coasts, and of a fleet of tankers to shuttle crude across the Caspian Sea would cost around $3bn, according to Woodward.

Most of the 70 tankers operating in the Caspian are old. KazMorTransFlot, a division of state-owned KazMunaiGaz, has begun building its own fleet. So far, two vessels have been delivered. Meanwhile, foreign companies are working with ship architects to develop vessels suitable for carrying large volumes of crude in the shallow, ice-infested waters of the northern Caspian.

BTC can survive economically without Kazakhstani oil. But there will be spare capacity until 2008, when the Azeri development reaches peak production. After that, adding drag-resistant agents to the line could create extra space. If Kazakhstani shippers are willing to provide long-term throughput guarantees, pump stations could be added, boosting BTC's capacity as high as 1.8m b/d.

Pipeline pressure

If Kazakhstan's shipments build above 0.5m b/d, there will be economic pressure to lay a pipeline across the Caspian. Ecologically, such a project would be difficult to implement. And Russia is likely to oppose any idea that would limit its control over exports out of the Caspian region. A clause in the draft Convention of the Caspian Sea outlawing the construction of offshore trunklines was inserted on Russia's initiative.

Finalisation by Azerbaijan and Kazakhstan of an agreement on BTC might pave the way for broader oil co-operation between the two republics. But, so far, their respective national oil firms, Socar and KazMunaiGaz, have not followed the lead of their Russian and Kazakhstani colleagues in setting up joint field-development projects in the Caspian.

Azerbaijan moved fast in the 1990s to parcel out offshore acreage to foreign consortia. Kazakhstan has promised for years to hold offshore tenders in the more prospective waters in the northeast Caspian. But, so far, all blocks have been let out under individually negotiated contracts. Russian firms, especially Lukoil, have fared particularly well, thanks to an offshore boundary treaty stipulating that three blocks in the north Caspian – Tsentralniye, Khvalinskoye and Kurmangazy – be shared 50:50 by Kazakhstan and Russia.

Multiple farm-ins are likely in the Kazakhstani offshore once high-cost developments begin in the area. Socar could spread its risks outside Azerbaijan by entering a Kazakhstani block.

Despite looming competition from BTC, Iran is continuing to invest in infrastructure that can enhance its role as a transit route and an end-user for Caspian oil. A 200,000 b/d terminal at Neka, on the south Caspian coast, is being expanded to handle up to 370,000 b/d of oil. Blending plants installed at Neka would then create a grade of crude acceptable at Iran's northern Tehran and Tabriz refineries, which are far from the country's oilfields in the south.

Iran is also backing a plan to build an export line south from Kazakhstan through Turkmenistan to the Mideast Gulf.

With BTC completed, interest will focus on a second pipeline, being built from Azerbaijan to Turkey. Much of the new South Caucasus Gas Pipeline follows the route of BTC. The Shah Deniz field in the south Caspian will be the source of gas for the pipeline, scheduled to start up in 2006. A group led by BP is investing just over $4bn in the early development of the field and the pipeline running from Baku to Erzurum, eastern Turkey. Some 8.4bn cubic metres a year (cm/y) of Shah Deniz gas will be marketed in Azerbaijan, Georgia and Turkey. The South Caucasus pipeline is designed to carry up to 20bn cm/y of gas.

Investors are eager to expand the Shah Deniz development. An appraisal well will be drilled at the field in 2006, both to confirm estimates that the field holds some 0.625 trillion cm of reserves and to explore deeper strata that could add to the total. Norway's Statoil, the pipeline's commercial operator, has a 25.5% stake in both the Shah Deniz field development and in the company building the gas pipeline.

Turkey, meanwhile, is determined to emerge both as a consumer of Caspian gas and as a major transit route for Caspian and Middle East gas supplies headed for European markets, Salih Pashaoglu, Turkey's deputy energy minister, told the Baku conference.

To Turkey and beyond

Construction will begin this month of a gas pipeline linking Karacabey, western Turkey, with Komotimi in Greece. The Turkish state-owned pipeline company, Botas, is building the 210 km section of the line in Turkey and Italy's Ghizzoni the shorter, 85 km section in Greece. Capacity will be 11bn cm/y. Supplies will begin in 2006.

Greek gas demand is limited and the country already has supply contracts with Russia and Algeria. Some 3bn-4bn cm/y of gas will be imported through the new line from Turkey. Plans are to extend the system to Italy with a 592 km pipeline crossing the Adriatic – Greece's Depa and Italy's Edison are overseeing this project.

"The pipeline from Turkey and the Italian interconnector fulfil Depa's twin objectives of diversifying gas-supply sources and promoting the transit business," said Vassilios Tsombanpoulos, Depa's general director of strategic planning.

Turkey and Greece are also promoting the Nabucco project to move 25bn-30bn cm/y of gas to Austria's Baumgarten terminal through Bulgaria and Hungary. The European Union has funded feasibility studies for the project.

Azerbaijan could be next
In the past year and a half, revolutions in Georgia, Ukraine and, most recently, Kyrgyzstan have dislodged leaders that had ruled their republics since the collapse of the Soviet Union 13 years ago. Democracy has not taken deep root in the former Soviet Union, but these popular uprisings have spread the idea, fundamental to democracy, that people should have the right and the power to change their rulers. Fraudulent elections were the trigger for the revolutions that have happened so far.

People are asking whether Azerbaijan, where there will be a parliamentary poll in November, is next in line to revolt. The country's economy is growing by over 20% a year and will probably continue to boom as oil and gas exports rise in the coming few years. But most of the republic's 5 million population is poor.

"Azerbaijan needs to share the benefits of its oil wealth with all the people," David Woodward, president of BP Azerbaijan, told 12th International Caspian Oil and Gas Conference in Baku, in June. Woodward called on the government to promote banking reform, tackle corruption and allow competition in the economy.

Azerbaijan's three main opposition parties have banded together to fight the parliamentary elections from a single platform. None of them wants to reverse the oil and gas contracts that are already in place, but they are demanding greater transparency and accountability in the way Azerbaijan manages its windfall oil wealth.

Ali Kerimli, president of Azerbaijan's Party of the National Front, says that if the government fails to allow free and fair elections mass protests will follow. He admitted his party had had no direct contact with BP. But he said that the UK major understands that the long-term stability necessary for it to thrive in Azerbaijan cannot happen without democracy and freedom.

The Organisation for Security and Cooperation in Europe (OSCE) harshly criticised the conduct of a presidential poll in October 2003, when Ilham Aliyev was elected in place of his ailing father, Heydar Aliyev. The forthcoming parliamentary election will reveal how the political landscape has evolved since then, said Maurizio Pavesi, head of the OSCE's office in Baku.

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