The mystery of the Caspian oil boom part two

THE construction of the Baku-Tbilisi-Jeyhan main export pipeline was launched near Baku in 2002 after many years of deliberation. Apart from far cheaper oil export alternatives, discussed in Part One of this article last month, a new threat to the Baku-Jeyhan project is now emerging from the east: the rapid growth in China's energy demand has led to projects to deliver oil and gas from the Caspian Basin by long-distance pipelines to China. Construction of an oil pipeline connecting Kazakstan and China will begin later this year. Will the future Kashagan production move east to China instead of west to Europe? In the absence of Kazak oil the commercial viability of Baku-Jeyhan will continue to rest solely on the availability of additional Azeri oil.

Iran is considered unanimously to be the most optimal export route for both Caspian oil and gas. It already has a well-developed oil and gas transportation infrastructure, including segments of pipelines that could be used on various routes. An export pipeline to the Persian Gulf could be significantly cheaper than the east-west corridor. All major oil companies operating in the Caspian Basin would prefer to transport Caspian oil and gas to world markets via Iran, where it would cost no more than $1 billion to complete the existing infrastructure, but the current US economic embargo policy prevents American companies from taking advantage of this commercially attractive alternative at the moment.

In spite of that, the National Petroleum Corporation of China (PetroChina). Total of France and even BP-Amoco have all separately studied the feasibility of building a main export pipeline from the Caspian to the Persian Gulf. A number of companies are already involved in oil swaps with Iran in exchange for Iranian oil at its Persian Gulf export terminals. For example, Kazakstan barges crude oil to the Iranian port of Neka on the Caspian Sea in exchange for Iranian exports of equal value from Kharg Island in the Persian Gulf.

The increase of tanker traffic through the Bosporus from the east coast of the Black Sea, where the existing pipelines terminate, into the Mediterranean has heightened the possibility of an environmental disaster in the Turkish Straits. About 3 mbd of crude oil pass through them daily. There are no fixed regulations for tanker passage through the Straits under the 1936 Treaty of Montreux, such as the Turkish refusal to permit nighttime passage and other stipulations, weather delays and demurrage charges. Such hazards have generated some rethinking on whether a bypass makes economic sense by transporting oil through overland pipelines running from the west coast of the Black Sea through the Balkans directly to European markets. In this context, three projects have been proposed:

1) The Greek-Bulgarian-Russian proposal to transport the oil coming in tankers from Novorossiysk via a Burgas (Bulgaria)--Alexandroupolis (Greece) pipeline as an alternative to its passage through the Turkish Straits into the Aegean Sea;

2) The Burgas-Vlore (Albania) project. Due to the current political turmoil in Macedonia, Kosovo and Serbia, all of which the line would traverse, its realization is unlikely. This pipeline must negotiate steep slopes, reaching 1500-2000 metres, of the three Balkan mountain ranges on the frontiers of Bulgaria, Macedonia and Albania;

3) The Constanza-Trieste pipeline that would run from Romania to Italy through the republics of former Yugoslavia. The advantage of this project is the fact that most of the pipeline infrastructure already exists and the line avoids any further maritime shipment in the Mediterranean Sea as it reaches the heart of industrial Italy at Trieste.

Bosporus bypass ideas abound, but only the Odessa-Brody pipeline has so far been built. The line runs from the Ukrainian port of Odessa on the Black Sea to Brody on the Polish border and was originally built to transport Soviet oil to the Black Sea. But Ukraine wants to reverse the flow and transport Caspian oil to Europe. The line could be extended as far north as the Baltic port of Gdansk in Poland. The issue keeping it idle has been whether Caspian oil will move north or west. The line serves also as a Bosporus bypass in that it reduces flows westward through the Turkish Straits.

The Rush of Natural Gas Suppliers

Not only were the Caspian oil reserves overblown over the past decade, but it had also been conjectured that Turkey's economic growth was constrained by the shortage of a natural gas supply. Politicians asserted that, having the region's fastest growing economy, Turkey urgently needed 10 billion cubic meters (bcm) of additional gas annually and its gas consumption was expected to reach 55 bcm by 2010 and 80 bcm by 2020.

Consequently, all Caspian gas producers rushed to the Turkish scene with constructions of expensive pipelines. Two giant projects, the Blue Stream from Russia and the Trans-Caspian pipeline from Turkmenistan, plus new lines from Iran and Azerbaijan, started the race to get to the Turkish gas market first. Turkey signed new agreements to purchase gas from Russia (currently its primary supplier), Turkmenistan, Azerbaijan, Iran and even Iraq, all of which would be delivered through a new pipeline infrastructure.