GEORGIAN PEACE KEY TO PIPELINES
Niko Mchedlishvili, Matt Robinson

The Moscow Times
Aug 6 2009

BASHKOI, Georgia — More than 800,000 barrels of high-quality Caspian
crude oil flow daily to the Mediterranean beneath this Georgian
village, 42 kilometers from breakaway South Ossetia.

Bashkoi marks the closest point at which the BP-led Baku-Tbilisi-Ceyhan
pipeline — one of several crossing the region — skirts the
Russian-backed territory, underscoring the risks to investors with
stakes in Georgia as an energy corridor to the West.

Last August’s five-day war over South Ossetia rattled nerves over
the flow of oil and gas. Analysts cite current plans to expand BTC
as evidence the worst fears were misplaced.

But a year on, with the sides facing off over tense boundaries and no
sign of a peace process, the risk of renewed hostilities remains high.

That threat could impact future projects, notably the U.S.- and
European Union-backed Nabucco gas pipeline plan, a 3,300-kilometer
transit route to bring gas to Europe from the Caspian and Middle East
by 2014.

Villagers in Bashkoi, a bumpy 110-kilometer drive west of the Georgian
capital, recall seeing jets and Russian Mi-24 helicopter gunships
during the war, and people fleeing the fighting.

"We still think about the possibility of another war with Russia,"
said 45-year-old school librarian Ketino Devdariani. "Do you think
war will start?" she asked a visiting reporter.

Devdariani said she hoped Nabucco would be built nearby, providing
a much-needed boost to the impoverished rural area, where some homes
stand abandoned by villagers who left looking for work elsewhere.

Nabucco’s rationale is to reduce Europe’s energy dependence on Russia,
but it has long been beset by problems with supply and financing.

Last month’s breakthrough transit deal between EU countries and Turkey
"indicates confidence in Georgia as a transport corridor," said Kate
Hardin, head of Russian and Caspian Research at U.S.-based Cambridge
Energy Research Associates.

A new war, however, would renew doubts about the viability of Nabucco,
which has yet to secure gas supplies from Azerbaijan. Instability in
Georgia has already played into Azeri thinking about where to sell
its gas, with Baku now looking to Russia as an attractive alternative.

"We still have no map for the pipeline and as a result there is
no discussion yet about Georgia being a transit nation," said Ana
Jelenkovic, an analyst at Eurasia Group.

"If Azeri supplies are secured by the Nabucco consortium and pipeline
construction discussions begin in earnest, then Georgia would be
discussed as a potential transit nation," Jelenkovic said. "I think at
that point you might have that issue [instability in Georgia] raised."

Georgia hosts major pipelines feeding oil and gas to Europe from the
Caspian Sea, including BTC and gas counterpart Baku-Tbilisi-Erzurum. It
also has three major Black Sea ports — Batumi, Poti and Supsa —
handling oil products and crude.

The war shattered progress made since Georgia’s 2003 Rose Revolution
to attract investment to the former Soviet republic under pro-Western
President Mikheil Saakashvili.

Poti was briefly held by Russian troops, and thousands of Russian
soldiers remain in Abkhazia and South Ossetia, some 50 kilometers
from Tbilisi at their nearest point.

BTC was closed for two weeks at the time of last year’s war due to
an unrelated explosion in Turkey, and it was not damaged in the
conflict. But bombs did fall within 15 meters of the Baku-Supsa
pipeline, which BP was then in the process of reopening, two years
after it had been closed for maintenance.

Russian troops seized the main East-West highway, and explosions hit
the key railway also used to export Azeri oil.

But the immediate impact of the war "was more like a hiccup in terms
of export disruptions — oil and gas exports were interrupted only
briefly, and the long-term impact on transportation has been less
than it could have been," Hardin said.

Azerbaijan re-routed some oil through Russia.

Then in June, it agreed to sell Russia a modest 500 million cubic
meters of gas beginning in 2010. Russian state-run gas giant Gazprom
said it had secured priority in buying gas from the second phase of
Azerbaijan’s Shah Deniz deposit — Europe’s main hope for supplying
Nabucco.

Analysts say Azerbaijan, faced with an unstable Georgia and trying to
balance political interests between East and West, wants to diversify
export options.

Underscoring the interplay between energy interests and territorial
disputes in the Caucasus, Baku is also looking for Moscow’s backing
in its dispute with Russian ally Armenia over the Armenian-backed
rebel region of Nagorno-Karabakh.