CRUDE AWAKENING / THE CASPIAN
Tuesday, May 24, 2005

The great Caspian Sea adventure
One of the biggest pipelines ever is set to turn on the taps in Azerbaijan,
says MARK MacKINNON. After years of hype, the question is: How much oil is
there, really?
By MARK MACKINNON

BAKU — Tomorrow morning, amid expected fanfare at BP PLC’s gleaming
Sangachal terminal on Azerbaijan’s Caspian Sea coast, crude oil will finally
start to flow into one of the most significant and expensive pipelines ever
built. It’s a day that, once upon a time, was supposed to forever alter
global oil markets, making prices fall at the gas station near you and
finally lessening the West’s reliance on the Organization of Petroleum
Exporting Countries.
But after 10 years of hype, the Caspian oil balloon has burst. When the
first crude begins its winding 1,760-kilometre path through mountain passes
and around conflict zones on its way to Turkey’s Mediterranean port of
Ceyhan, few will be expecting it to have much of an impact on oil prices.
Instead, the question that will be asked is: How much more oil is there,
really? And how did so many get so badly snookered?
The $3.6-billion (U.S.) Baku-Tbilisi-Ceyhan, or BTC, pipeline, was born of
the excited chatter that surrounded the Caspian in the early 1990s, when
there was a mad stampede to the region, which had previously been sealed
behind the walls of the Soviet Union.
Big oil firms spoke fantastically of a “new Middle East” without the
tormented politics of that region. Tiny Azerbaijan, a former Soviet republic
in a very strategic position, was to become the next Kuwait.

Diversifying has become the buzzword of a Western world hooked on Middle
Eastern oil after Sept. 11, 2001, when the perils of counting on the
volatile Persian Gulf for supply were made all too clear. Since then, oil
companies have scoured every corner of the planet, looking for the big find
that could cut down reliance on OPEC.
Back in the 1990s, the U.S. State Department was the lead cheerleader behind
the boom, telling analysts and oilmen that there were up to 200 billion
barrels of crude under the choppy black waters of the Caspian Sea, a figure
comparable only to the 262 billion barrels believed to sit beneath the sands
of Saudi Arabia. No less a figure than Dick Cheney, then the plugged-in
chief executive officer of oil services giant Halliburton Co., got caught up
in the excitement. “I cannot think of a time when we have had a region
emerge as suddenly to become as strategically significant as the Caspian,”
he said in 1998.
At Washington’s urging, the BTC was born along its incredibly complex route
through Azerbaijan, Georgia and Turkey to make sure the oil got to Western
markets without dallying in Iran or Russia (the route via Iran would have
been far shorter and cheaper). The end terminal, at Ceyhan, sits not
coincidentally near the U.S. air force base at Incirlik.
Before the rush, Azerbaijan, home to a mainly Muslim population of 7.6
million at the southeastern end of the Caucasus mountain range, was a
forgotten and crumbling backwater at war with its neighbour, Armenia, over
the disputed province of Nagorno-Karabakh. Today, an uneasy peace holds on
that border, and the money that followed the oil to Azerbaijan is visible on
the skyline of its capital city, Baku, where Western-style apartment
buildings and glitzy hotels have sprung up to surround its stone-walled old
city centre.
But just as the crude is finally starting to creep westward, it’s becoming
clear that there’s much, much less oil in the region than had been
originally trumpeted. Instead of the 200 billion barrels predicted in 1995,
most estimates now put the figure at somewhere between 17 and 32 billion,
most of it on the other side of the Caspian from Azerbaijan, in the waters
off Kazakhstan.
BTC will still bring a desperately awaited one million barrels a day to
market once it hits full capacity in an estimated four years’ time, but —
in providing perhaps 3 per cent of global supply — it’s going to do nothing
to change the West’s reliance on the House of Saud.
“I think that there were some people that did exaggerate the amount of oil
reserves in the Caspian. That is without doubt,” said Michael Townsend,
executive director of BTC Co., the BP-run company managing the pipeline.
“It’s not another Middle East. It’s more similar to another North Sea, or
Algeria, or Norway.”
Sitting in BP’s head office in central Baku, a former Communist Party office
known locally as the “Villa Petrolea,” Mr. Townsend labels the initial
filling of the BTC a major accomplishment for his company, coming after
years of delays caused by environmental concerns, cost overruns and
political wrangling.
There were always dissenters about how much crude lay in the Caspian basin.
The London-based International Institute for Strategic Studies issued a
report in 1998 that said the State Department estimate was “an order of
magnitude away from reality” and that there was likely somewhere between 25
billion and 35 billion barrels, including discoveries not yet made. The
respected Oil and Gas Journal gave an even more low-ball figure — saying
proved reserves totalled only eight billion barrels.
But the State Department figure, developed with the U.S. Department of
Energy and published in a report to Congress in 1995, was the one many here
say drove the rush to Baku. Three years later, a State Department official
admitted the number was “speculative.”

“The 200 billion figure was never really realistic, but people believed it
because it was official,” said Robert Cutler, a Montreal-based researcher
specializing in the Caspian region. He said it was intensely promoted by the
Clinton administration because it suited American geopolitical aims to draw
Western investment to countries such as Azerbaijan and Georgia so as to pull
them out of Russia’s orbit.
In September, 1994, at the height of the hype, Azerbaijan signed a
$7.4-billion production sharing pact with 11 foreign oil majors to develop
the initial Azeri-Chirag-Guneshli field.
But, perhaps unsurprisingly in a country ranked 140th out of 146 countries
on Transparency International’s annual corruption index, the oil isn’t where
Azeri geological maps said it would be. Only one significant discovery has
been made since the fall. While Azeri-Chirag-Guneshli has played out largely
according to expectations so far, producing 130,000 barrels a day, other
majors that signed in its wake have hit dry well after dry well. Of 15
production-sharing agreements signed in the Azeri sector of the Caspian
since then, only two have proven commercially viable.
For those companies who did flock to the region in those years, the problem
has flipped from how to build enough pipelines to get all that oil to
market, to how to find enough oil to keep the pipelines filled and
economically viable.
The first oil from the BTC is expected to be boarded onto ships at Ceyhan
and heading to market by year’s end. Mr. Townsend admits the pipeline will
not be full the whole time, but says it still makes economic sense even if
it is used only to pump out Azerbaijan’s recoverable reserves over the next
20 years.
He dismisses two studies by independent American think tanks, the Cato
Institute and the Carnegie Endowment for International Peace, that suggested
BTC will require hundreds of millions of dollars in subsidies to break even.
But in the next breath he adds that he’s working hard to persuade Kazakh
officials to ship their oil via BTC, rather than the current route through
Russia to the port of Novorossiisk.
BP, however, has done better than most through Azerbaijan’s boom-gone-bust.
Other oil majors who rushed to Baku have come away bruised. In March, Exxon
Mobil Corp. announced it would quit exploring two fields it owns off the
coast of Azerbaijan after spending $150-million at one of them only to find
nothing. It is so sure that there is nothing commercially viable at the
second field that it has offered to pay the government $27-million to escape
its exploration contract.
While swearing that it has not given up entirely on Azerbaijan, Exxon
decided to slash its staff at its Baku office. Late last year, the Russian
oil major OAO Lukoil also cut back its involvement after an expensive series
of dry wells. There’s little hope left that the excitement of the 1990s will
ever be justified.
“Azerbaijan is one of the most drilled countries on the face of the earth,”
said Raymond Conway, an Albertan who works as senior banker in the Baku
office of the European Bank for Reconstruction and Development, a major
backer of the BTC project. “There could still be some major finds, but I
don’t think anyone here expects that to occur.”
‘There were some people that did exaggerate the amount of oil reserves’
MICHAEL TOWNEND, CASPIAN PIPELINE MANAGER, BTC CO.
‘It’s hot the substitute for Persian Golf oil that we’ve been looking for’
ROBERT EBEL, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES
‘Any incremental oil is significant. It doesn’t fix the problem, but it
does help.’ DAVID KNAPP, ENERGY INTELLIGENCE GROUP OF NEW YORK
>From sea to sea
The Baku-Tbilisi-Ceyhan (BTC) pipeline is a $3.6 billion (U.S.) project to
deliver crude oil from the Caspian Sea off Azerbaijan, through Georgia to
Turkey, for delivery to world markets. The BTC pipeline is expected to be
able to transport up to one million barrels of crude a day from discoveries
in the Azeri-Chirag-Guneshli (ACG) field of the Caspian Sea.
Baku basics
Partners: The pipeline is being developed by a consortium of 11 partners:
SOCAR (the state oil company of Azerbaijan); BP (Britain); TPAO (Turkey);
Statoil (Norway); Unocas (U.S.); Itochu (Japan); Amerada Hess (U.S.); Eni
(Italy); Total (France); INPEX (Japan); and ConocoPhillips (U.S.). BP is the
largest stakeholder and is leading the design and construction phases.
Length: 1,760 kilometres (445 km in Azerbaijan, 245 km in Georgia and 1,070
km in Turkey)
Design life: 40 years
Maximum altitude reached: More than 2,800 metres.
Road and rail crossings: More than 350 in Azerbaijan, 70 in Georgia and 300
in Turkey.
Watercourse crossings: More than 700 in Azerbaijan, 200 in Georgia and 600
in Turkey.
Reserves: The U.S. Energy Information Administration estimates that the
Caspian region contains 17 to 33 million barrels of oil “comparable to Qatar
on the low end and the United States on the high end”
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