The mystery of the Caspian oil boom part one

Contemporary Review, Sept, 2004 by Alec Rasizade

The Baku-Jeyhan and Alternative Oil Export Projects

After many years of deliberation, construction of the Baku-Tbilisi-Jeyhan (Turkey's Mediterranean coast) main export pipeline was launched near Baku in 2002. The capacity of this 1730 km line will be 50 million tons of oil per year. The cost is estimated at around $4 billion, compared to $1 billion for a new export pipeline to the Persian Gulf through Iran.

However, Baku-Jeyhan is not economically feasible. It needs a daily throughput of one million barrels of oil to be financially justified. Azerbaijan produces less than 15 million tons a year, while Kazakstan produces more than 40 million tons. Even the existing Baku-Supsa (Georgia's Black Sea coast) pipeline is being currently filled only to one-quarter of its 18 million-ton annual capacity. Where will the oil needed to fill the 50 million-ton Baku-Jeyhan line come from? Azerbaijan will be able to produce only about 600,000 barrels per day (bpd) when all its consortia reach their peak by 2010, and even less thereafter. For comparison, Kuwait is producing 2.14 mbd, its quota from the OPEC, and has enough oil to pump 2 million barrels daily for 132 years. According to all geological appraisals, Azerbaijan has enough oil reserves for only 27 years at its current level of production.

Such major companies operating in the Caspian Basin as Exxon-Mobil, Chevron-Texaco, Royal Dutch Shell, ENI of Italy and Lukoil of Russia have been asked but declined to join this project so insistently promoted by the US, Turkish, Georgian and Azeri governments. The failure of negotiations frustrated the project's long bid to draw additional oil from Kazakstan to fill the pipeline's 1 mbd capacity. British Petroleum (the chief operator of the Baku-Jeyhan project) insists that there will be no such problem and that Azerbaijan's own oil alone will be enough. But studies by two independent research groups in Washington, the Cato Institute and the Carnegie Endowment for International Peace, have calculated that the Baku-Jeyhan pipeline would need $200 million per year in subsidies from the US government to remain viable.

Other oil companies favour cheaper alternatives that would use the existing pipeline facilities. They would send an extra 100,000 bpd west through Baku-Supsa, an extra 100,000 bpd north, through Baku-Novorossiysk, and 100,000 bpd south to Iran, to be swapped for export shipments from its Persian Gulf terminals. This combination could handle all the extra oil Azerbaijan hopes to export over the next ten years, and if additional pipelines are needed later, there will be time and money then. Such diversification has been fiercely resisted by the USA and Turkey for fear of damaging the prospects for their Baku-Jeyhan geopolitical project.

Meanwhile, Russia has completed in 2002 its 1,580-kilometer North-Caspian pipeline linking Kazakstan's Tengiz oil field to Russia's Black Sea port of Novorossiysk. Tengiz is the world's sixth-largest land field with 9 billion barrels of oil in reserves and is operated by Chevron-Texaco.