Time: Oil’s Vital New Power

19 January 2007 [17:48] – _Today.Az_
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In the control room of Azerbaijan’s sprawling oil terminal near the
capital, Baku, Bala Mirza sits peering at a fuzzy map on a computer
monitor. The outline of Azerbaijan, Georgia and Turkey looks like
little more than a jumble of hills and farming towns. But for the
engineer, 41, what lies underground has rocked his world: a new
1,100-mile oil pipeline, which in recent months has tied this tiny
country on the edge of the Caspian Sea to the huge Western
market. "There is a lot of oil and a lot of money," says Mirza, who
spent 14 years earning about $10 a month working on a creaking old
Soviet oil rig. "And because there is a lot of money, our lives will
surely improve."

The stakes in Azerbaijan’s new pipeline are far higher than the
fortunes of just Mirza and his family. This Muslim republic, directly
north of Iran and tucked into the southwest corner of the vast former
Soviet empire, is suddenly a central player in one of the West’s most
distressing problems: how the U.S. and Europe will secure enough oil
and gas to power cities, factories, airplanes and cars–in short, how
to keep our entire modern lives afloat. Since last June, hundreds of
thousands of barrels of oil a day have surged through a pipeline
running from Baku through Georgia’s capital, Tbilisi, to Turkey’s
Mediterranean port of Ceyhan. Named the Baku-Tbilisi-Ceyhan (BTC), the
$4 billion pipeline is one of the world’s longest and is operated by
the British-American oil company BP, with partners that include
U.S. oil companies Chevron, ConocoPhillips and Hess. By spring, about
1 million bbl. a day will move down the pipe, and BP could increase
that soon after to about 1.5 million bbl. a day. A parallel BP
pipeline opened last month to send hundreds of billionsof cubic feet
of natural gas from the Caspian to Western Europe, in order to break
the Continent’s overwhelming reliance on Russia.

As a piece of engineering, the BTC pipeline is a brilliant
geopolitical bank shot. Built over three years, the pipeline had to
skirt war zones in the Armenian-occupied Nagorno-Karabakh region in
Azerbaijan, and in Georgia, which has been in a conflict with South
Ossetian separatists. Then there were the engineering issues: the
pipeline had to pass under about 1,500 rivers. At one point BP hired
400 archaeologists to sift through the mountain of ancient artifacts
unearthed along the way. Equally daunting was the political
wrangling: two of the three countries changed Presidents during
construction, requiring lengthy renegotiations over the deal.

But to the countries and the global oil companies, the benefits are so
compelling that they trump politics and old ethnic rivalries. The
Caspian’s oil and natural gas reserves, which some estimates have put
as large as 200 billion bbl. (vs. 260 billion in Saudi Arabia), could
deliver economic independence to the South Caucasus region and energy
independence to the West. "This is about diversifying energy
supplies," says Michael Townshend, a BP executive who ran the project
in Baku until last year. "It is not from the Middle East and it is not
from Russia."

Fifteen years after the Soviet Union’s collapse, it’s tempting to
think of the cold war as history–until you land in Baku. This is the
front line ofa new East-West contest, one that is as consequential as
the nuclear-weapons face-off of the past: the battle for energy
supplies among countries heavily dependent on imported oil and gas,
which include the U.S. and the E.U., plus the rocketing economies of
China and India. That necessity is a powerful weapon in this new
battle. Shortly before Christmas, Russian President Vladimir Putin
forced Royal Dutch Shell to cede control of Sakhalin II, the world’s
biggest oil and gas project, to the state-owned giant Gazprom, opening
theNorth Pacific island’s vast resources to Asian markets. The $7.45
billion price was small to Gazprom, whose value has soared from $9
billion in 2000 to $270 billion today, after years of record energy
prices.

That’s given Russia immense power to dictate terms for much of
Europe. In one power play, the Russians briefly blocked gas last
winter to Ukraine, leaving millions freezing. In December, Putin
threatened to do the same toBelarus unless it began paying
Western-level gas prices. Belarus agreed. Infuriated that Azerbaijan’s
new BP-operated pipeline to the West bypasses Russia, Putin has said
he intends to double gas prices for Azerbaijan, which in turn
threatened to stop exporting its oil through the Russian-controlled
section of the Baku-Novorossiysk pipeline to the Black Sea. "We want
to put an end to this!" says Khosbakht Yusifzadeh, slamming his fist
on his desk. He is the aging first vice president of the State Oil
Co. of Azerbaijan and spent decades as a Soviet official. The
country’s best shot at breaking Russia’s grip is BP’s parallel gas
pipeline, which in December began transporting gas from Azerbaijan’s
massive Caspian Sea gas field named Shah Deniz. "I see it now," says
Yusifzadeh, looking at a wall map of the Caspian Sea in his office. "A
photo of Shah Deniz with the caption: THIS IS THE PLACE THAT MADE
AZERBAIJAN INDEPENDENT OF RUSSIA."

That could take a while. Azerbaijan–which BP says stands to earn
about $230 billion from BP’s pipeline during the next 20 years–has
rarely been independent either of Russia’s influence or foreign
treasure hunters. Baku’s élite included the Rothschilds during the
1890s, when Azerbaijan produced half the world’s oil supply. Oil
production slid steadily as the Soviets let the infrastructure
rot. Today hundreds of rusted oil derricks and pump jacks, many
predating World War II, cram the seafront outside Baku like a
scrap-metal forest, with old Soviet tractors turning several
wells. The astonishing sight was memorialized in the 1999 James Bond
movie The World Is Not Enough. Towering over the area now is a
16,000-ton water-injection platform being built by BP, which will be
towed to an oil field 75 miles offshore, where the company expects to
pump about 320,000 bbl. a day beginning in April 2008. "This isa time
of big change," says Mushvig Osmanov, 26, an Azeri engineer for BP,
standing atop the half-built platform, gazing at the crumbling old oil
wells. "Suddenly we have Western styles and tastes."

Those new energy-fueled tastes are turning Baku into a boomtown,
despite widespread poverty in the rest of the country. Regular Azeris,
who have an average cash income of $1,140 a year, are reeling from
inflation (tomatoeshave recently doubled in price). But much of Baku
is upbeat and partying. "There’s a mood that Azerbaijan is now
sustainable," says Foreign Minister Elmar Mammadyarov. BP’s operation
has brought in thousands of oil workers and businesspeople, mostly
British, who pack nightclubs with names like Le Chevalier and Le
Mirage to dance with local women dressed in spiked boots and
miniskirts.

Baku’s billboards announce this season’s store openings, including
Harry Winston, Cartier and Giorgio Armani. Others offer 18.7% interest
at the Bank of Baku.

One evening, I watched a fashion show to open the new store of Escada,
the German luxury label. Baku’s rich sipped California Merlot, while
models flown in from Moscow walked the makeshift runway. There are 300
apartment buildings currently under construction in Baku and 250
others have recently opened, says Elnur Asadov, a real estate agent
who guides me around a new three-story mansion with an indoor swimming
pool and sauna. "People buy apartments when the ground is broken and
sell when the building is up," he says. "That way they can double
their money."

The U.S. sees its alliance with a republic of just 8.4 million
people–about the same population as New York City–as key to securing
energy supplies at a time when China and the rest of Asia are
competing for new sources. The Caspian, which is largely unexplored,
probably accounts for 7% of the world’s oil reserves, and the oil
flowing through the new West-bound pipeline still represents a mere 1%
of global supply. But ultimately some of the gas from Khazakstan and
Turkmenistan’s much larger natural-gas fields across the Caspian from
Baku could flow through BP’s pipelines, turning to the West rather
than to Asia. "The pipeline is changing the strategic map in a very
major way," says a senior State Department official.

A glance at the map shows why: Azerbaijan is sandwiched between two
energy giants–Iran to the south and Russia to the north–allies and
old U.S. foes whose reserves will last decades. The U.S. has three
interests in Azerbaijan: securing energy, spreading democracy and
fighting terrorism. Vafa Guluzadeh, a former adviser to President
Heydar Aliyev, whose decade-long rule over Azerbaijan ended in 2003
when he maneuvered his son Ilham’s succession, remembers translating a
phone call from President Bill Clinton to his boss in 1994.

"Clinton said, ‘Mr President, we need to diversify the oil
pipelines. We need a new route.’ It was all a very strategic plan,"
says Guluzadeh, sipping coffee in Baku’s Park Hyatt, where Western and
Asian businesspeople fill the $250-a-night rooms.

Thirteen years later, Azerbaijan is one of the few Muslim countries to
fight in Iraq alongside American soldiers. The U.S. has financed two
radar stations in Azerbaijan, one a few miles from the Iranian
border. U.S. NavySEALs have trained teams to guard the Caspian’s
underwater pipelines, and U.S. Customs agents have overseen border and
airport security systems. With Baku just a couple of hours’ drive from
Iran, "Azerbaijan could be the world’s only secular country with a
Shi’ite majority," says the State Department official.

Azerbaijan might be secular, but it is hardly democratic. Local
elections in 2005 and the presidential vote that brought Ilham Aliyev
to power in 2003 were both flawed, according to U.N. and American
election observers. A free press? Hardly. One afternoon in December,
TIME’s team was taken to a police station near Baku and questioned for
three hours about our activities. In Baku, the late former President’s
face peers down from billboards, and a huge statue of him stands in
one of the many Heydar Aliyev parks. On the third anniversary of
Aliyev’s death, in December, government television channelsaired
round-the-clock programming about his life. The footage aired also on
large screens on street corners.

But can Azerbaijan grow richer without growing freer? Some Azeris
believe Western governments prefer energy security to political
freedom, as was sought in the 2004 revolution in Ukraine–a major
transhipper of natural gas to Western Europe. "The U.S. will never
support democrats in Azerbaijan because of their oil interests," says
Guluzadeh. But Azeris might start to demand more democracy if oil
revenues do not trickle down. The country is listed as one of the
world’s most corrupt by the Berlin-based Transparency
International. "The average citizen is very suspicious of the
government," says a Western official in Baku, who did not want to be
named. "But if the oil wealth is not distributed, you will see people
wanting a change."

Back in the oil terminal outside Baku, Bala Mirza, the engineer at the
computer monitor, says he has already reaped benefits from the new oil
boom. His life is barely recognizable from those days when he earned
$10 a month on that offshore Soviet rig. Since joining the pipeline
project in 2003, he has bought a car for himself and for his father,
who worked in Soviet oil production for 30 years. But the real test of
how Azerbaijan has changed will be the future of Mirza’s daughter, who
is now 10. "When all our oil is finished, say, in 50 years from now,
there should be no problems for her." So until then, party on, Baku.

By Vivienne Walt
TIME magazine

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