Economist, UK
June 9 2005

The oil satrap

Jun 9th 2005
The Economist print edition

David Woodward and being a giant in a small country

FOR much of the 18th century the managers of the mighty East India
Company were also said to be the de facto rulers of chunks of the
Indian subcontinent. These days, perhaps the only foreign
organisation with so big a say in the affairs of the countries that
host it is the American armed forces. But according to some observers
in Baku, British Petroleum (BP) has almost the same status in
Azerbaijan, a Caucasian petro-state on the western shore of the
Caspian Sea.

There are few countries in the world more dependent on one industry
than Azerbaijan is on energy. Oil products account for more than 80%
of exports. BP is the biggest player in Baku, the capital. It has the
largest stake (34%) in the `Azeri, Chirag and Deepwater Gunashli’
(ACG) oil project, a deal known as `the contract of the century’ when
it was done in 1994, relaunching Baku as a major oil town after it
declined as the Soviet authorities concentrated on Siberian energy.
BP, whose turnover last year was over 30 times the size of
Azerbaijan’s GDP, is also the biggest shareholder in a new pipeline,
officially inaugurated last month, which will deliver Caspian oil
from Baku to the Black Sea port of Ceyhan in Turkey, via Tbilisi in
Georgia. Named after those towns, the BTC pipeline and the oil wells
are seen by some as making David Woodward, BP’s local boss, the
country’s second most powerful man, after Ilham Aliev, who inherited
the presidency from his father after a disputed election in 2003.
Others rank Mr Woodward third, behind the American ambassador.

British Petroleum has information about its operations in Azerbaijan.
BP also reports on its activity in the Caspian region. See also the
BTC project, the Extractive Industries Transparency Initiative and
Azerbaijan’s president.

The oil off the coast of Azerbaijan, says Mr Woodward – or `VoodVard’
as he is known in Baku – is `an oil-man’s dream.’ The water is
relatively shallow, and the drilling conditions good. The trouble has
been finding a way to get it to market. America lobbied hard for the
BTC; the route avoids both Iran and Russia and it will help to reduce
global dependence on Middle Eastern supplies. The fillip it brings to
Azerbaijan, and to a lesser extent to Georgia, will help to shore up
the shaky finances of two ex-Soviet countries. Turkey, the other
beneficiary, wants no additional tankers to use the already-choked
Bosphorus, a conduit for oil from an existing pipeline from Baku.

In the unstable Caucasus, the BTC’s completion, albeit after a decade
of wrangling, is a triumph. Each time the government of one of the
participating countries has changed, says Mr Woodward, the new one
had to be re-educated. The route itself is a metaphor for the
region’s volatile politics: along its 1,770km (1,010 mile) length, it
bends northwards through Georgia to cut out Armenia, with which
Azerbaijan fought a war in the 1990s.

The hope is that, as the oil travels south-west, stability will flow
the other way along with the revenues. But there are big risks.
Armenia still occupies part of Azerbaijan, and there are separatist
enclaves in Georgia and restless Kurds in Turkey. Mr Woodward says
that other targets will be easier for terrorists to strike, and more
difficult to rebuild, than the pipeline, which is buried at least one
metre under ground and will be guarded by horseback patrols.
Earthquake risk has been mitigated, says Mr Woodward, by laying the
pipe obliquely across the fault zone.

The BTC will take up to six months to fill: the first shipments will
not leave Ceyhan until the last quarter of this year. By 2008, it
will carry 1m barrels of oil per day, or about 1.3% of global supply.
But it may not deliver quite so much as BP first hoped. Mr Woodward
insists that `the contract of the century’ remains a good deal, and
that, with the ACG’s 5.4 billion barrels of recoverable reserves, the
pipeline will more than cover its $4 billion total cost. (Starting
next year, gas produced by another BP-led consortium will flow
through a parallel line.) And yet the other giant oil finds once
expected in the Azerbaijani section of the Caspian have so far failed
to materialise. Talk about Azerbaijan being the new Kuwait has faded.
The BTC consortium now hopes that some of the oil in the Kazakh
fields across the sea will pass through the new pipeline, or perhaps
oil from Russia, despite the Kremlin’s distaste for the project.

When the oil runs out
A good deal for BP, and a useful if marginal contribution to global
oil flow; but a good deal for Azerbaijan? Sceptics of big oil’s
motives might expect BP’s only political goal in Azerbaijan to be
stability, even if, under President Aliev, that sometimes involves
the sort of nastiness evident when a demonstration was violently
dispersed just before the pipeline ceremony. Some in Baku who
expected BP to import democracy along with its drilling kit are
already disenchanted. But Mr Woodward says that, for BP’s involvement
to be sustainable, the population needs to share in the benefits of
the country’s oil windfall, and quickly. In Azerbaijan, says Mr
Woodward, who has worked previously in Norway and Alaska, BP has
entered `unknown territory,’ exploring the limits of enlightened
self-interest.

The big challenge, in a country that ranks among the world’s most
corrupt, is to ensure that Azerbaijan’s share of the oil revenue is
used to transform its economy (rather than, for instance, to pay for
another war with Armenia). Unemployment is high; outside the oil
sector, even many who have jobs live in poverty. `Dutch
disease’ – whereby the exchange-rate impact of the oil revenues damages
other exports – has already struck. There are, as Mr Woodward says,
some encouraging signs. Diplomats in Baku say that the state oil
fund, the receptacle for the windfall cash, is the country’s most
transparent institution. Mr Aliev’s government has signed up to the
Extractive Industries Transparency Initiative, a British-backed
scheme designed to help resource-rich countries avoid corruption. BP
and international financial institutions are helping too. But one
day, of course, when the oil and the gas run out, BP and its partners
will pack up. Will they leave behind a prosperous country, or a mess?
Perhaps only President Aliev can decide that.