Who Should Regulate the Baku-Tbilisi-Ceyhan Pipeline?

Georgetown International Environmental Law Review, Spring 2004 by Waters, Christopher P M

I. INTRODUCTION

The roughly U.S. $3 billion Baku-Tbilisi-Ceyhan (BTC) pipeline project is intended to transport oil from the Caspian Sea to the West. At a length of 1,090 miles, it will be the world's longest export pipeline when completed. The three countries over which the pipeline will travel -Azerbaijan, Georgia, and Turkey - desperately want the pipeline for economic reasons. So too does the consortium of "big oil" and its supporters among Western governments. The United States in particular is keen to obtain non-OPEC oil and at the same time avoid transport through Russia and Iran for geopolitical reasons.1 But the legal basis for the pipeline has come under heavy criticism from environmentalists, human rights activists, and ordinary citizens of the region. They argue that the agreements which have been put in place between the three states and the oil companies insulate the latter from the reach of national laws, including environmental regulation and the protection of human rights. This article aims to evaluate the claims of opponents of the "pipeline regime" and consider the obvious alternative, namely domestic regulation of pipelines by Georgia, Azerbaijan, and Turkey. It argues that while the pipeline regime is bad (and amendments could only partially cure it), pure domestic regulation of the industry would be worse. The state of governance and the rule of law in the South Caucasus, and to a lesser extent Turkey, would make domestic governance impractical - scaring away desirable investors and environmentally dangerous.

This article will also argue that environmentalists, human rights activists, the oil industry, and Western governments have common ground which they have undervalued: the need to promote sustainable development through better governance. In fact, the lack of two key elements of governance - democracy and the rule of law - have hugely inflated the financial, environmental, and socio-political costs of the pipeline project. Rather than allowing oil companies to save money by avoiding "burdensome" regulation, the lack of the rule of law has forced decisions that make little commercial sense. The same goes for the lack of democracy. Despite having political leaders in place who are sympathetic to "big oil" interests, lack of democracy has led to instability and costly measures to mitigate the effects of the instability. To make this clear, this article will take as a case study the controversial routing of the pipeline as it passes through Georgia.

The next section, Part II, outlines the pipeline regime and criticisms of the regime from environmentalists and human rights activists. Part III then speculates on the starkest alternative to the pipeline regime, namely domestic regulation. It measures the domestic capacity for regulating the oil and gas industry by using the sustainable development rubric, and particularly the need for governance. The case study presented in Part IV reflects on the baffling - from both a sustainable development and a financial "bottom line" perspective - decision to route the pipeline through Georgia's environmentally sensitive Borjomi Gorge area, rather than through the safer and cheaper Javakheti area. Part V then concludes with a discussion of the need for improved governance in the South Caucasus before either environmentally or financially sound decisions can be made on hydrocarbon exploitation or transit.

II. THE PIPELINE REGIME AND ITS CRITICS

There are two related components of the BTC pipeline regime. The first is an Inter-Governmental Agreement (IGA) between the three states involved. The second is Host Government Agreements (HGAs) between the states and the BP-led oil consortium. Both the IGA and the HGAs have sparked opposition, though the HGAs have been the target of the most severe criticism and are the focus of this section.2

The HGA concept is not new to this pipeline or indeed to this region. From the beginning of post-Soviet oil exploration in the Caspian region, variations on this model have been used. The first HGA in Azerbaijan (in that case called a Production Sharing Agreement or PSA) was between the state oil company (SOCAR) and a consortium of eleven major foreign oil companies known as the Azerbaijan International Operating Company (AIOC). The 1994 PSA has a term of thirty years and covers the development of the Azeri, Chirag, and deep-water Gunashi oil fields in Azerbaijan's sector of the Caspian.3 Although this and other PSAs concluded with Azerbaijan provide for environmental protection measures, the PSAs require the oil consortiums to comply with Azerbaijani environmental and health and safety legislation only to the extent that those standards are not more stringent than international petroleum industry standards in place at the time the PSA was signed. In Azerbaijan (similar to the situation in other former Soviet states), the PSAs have been rendered "international agreements."4 As such, under a novel interpretation of Azerbaijan's constitution, the PSAs take precedence over domestic legislation, essentially constituting an opt-out for large oil interests from some aspects of the standard legislative regime for oil and gas exploitation and environmental protection. From the oil companies' perspective, PSAs give them "one stop shopping"; Azerbaijan's SOCAR is empowered to negotiate all aspects of an oil deal and permission is not needed from a myriad of ministries, agencies, and local authorities. Furthermore, from one perspective, these agreements mitigate the risk of investing in an unstable region by insulating companies to some degree from inefficiency or corruption in government and the legal system.