The Caspian oil fix

The Bush administration has inherited an energy crisis as one of its highest priorities.

OPEC production cutbacks, blackouts in California, and soaring energy costs across the nation have focused the new administration's attention on seeking new, reliable sources of power.

The Bush administration favors opening up more of the Alaskan wilderness to drilling. But even if the necessary legislation were passed, this would provide no immediate solution to energy shortages in the Northeast and California.

The US does have at its disposal a foreign "quick fix" possibility, one that can provide 800,000 barrels of oil per day to consumers. This potential fix is the developing Caspian energy reserve of the Caucasian and Central Asian post-communist states, notably Azerbaijan and Kazakhstan. Estimates of regional reserves range between 50 billion and 200 billion barrels; many analysts put the potential impact of the region on a par with the North Sea.

Most important for the West, these reserves lie in non-OPEC states, desperate for cash to revive their ailing economies. Kazakhstan's position is the clearest example of this desperation. While it has applied for OPEC observer status, its government has stated it would not reduce exports even at a time of OPEC cutbacks.

The situation would seem an ideal match between buyers and sellers. The oil is there, and already under development. The only problem is getting it to Western markets.

Unfortunately for the West, these reserves lie within the Russians' perceived sphere of influence, and President Vladimir Putin's government has been moving aggressively to reassert influence over its former colonies. Like it or not, the Bush administration will be pulled into a game of geostrategic hardball, which will have consequences for years to come.

Russian intentions toward the region are already clear. In early January, Mr. Putin and an entourage of 400 visited the Azerbaijani capital of Baku to size up its president. Both Azerbaijan and Georgia are run by former Soviet Politburo members. Both are elderly, and Azeri President Gaidar Aliev is in frail health. As the region looks toward new leadership, Russia intends to pull these countries back more firmly into its sphere after a 10-year drift toward the West. Geopolitics will strongly influence the eventual flow of the Caspian's "black gold," and Putin is determined to have as much say - and profit - from its export as possible.

At issue are the potential routes for a soon-to-be-built main export pipeline to carry Caspian oil. While the oil companies clearly prefer a Caspian-Persian Gulf route, American sanctions against Iran dim prospects for developing this route in the short term. All the regional powers have a vested interest in promoting their route at the expense of their competitors. At stake are hundreds of millions of dollars in annual transit fees.

Furthermore, the evolving energy policy of the US could well conflict with that of its European allies. On a visit to Brussels last October, Russian Deputy Prime Minister Ivan Ivanov proposed a tempting offer of guaranteed European Union access to Russian energy reserves for the next 20 years. In return, the EU would drop support for a pipeline that would run between Baku and Ceyhan, Turkey.

The Clinton administration and Turkey favored a Baku-Ceyhan pipeline. At 1,080 miles, this route is the longest, with an estimated construction cost of up to $3.5 billion. Despite persistent lobbying, the American government has been largely unsuccessful in gaining oil-companies' support for the project. They argue that current flow rates of 800,000 barrels per day make the line unprofitable.

The line that runs from Baku to Supsa, in the nation of Georgia, became operational in April 1999. The earliest working line runs north from Baku and terminates in the Russian port of Novorossiisk. Putin is using every pressure tactic available to urge the Azeris to commit to the expansion of this route, which will increase in volume this summer when the Kazakhs' Caspian Pipeline Consortium's line to Novorossiisk becomes operational. If the Bush administration does not act quickly, the bulk of Caspian production will transit through newer pipelines into the preexisting Russian network, enriching the Kremlin while giving it a strategic pressure point against the energy-hungry West.

Complicating the picture is Turkey, NATO's only Muslim member and a stalwart American ally. The Turkish government and public opinion are strongly opposed to expanding the Baku-Supsa and Baku-Novorossiisk lines, since they would increase tanker traffic through the narrow Bosporus and Dardanelles. Furthermore, under the convention that governs passage of the waterway, Turkey would receive no transit fees. The Turkish government has consistently stated that it will oppose an increase in tanker passage of the Turkish straits, and there is no reason to doubt it. Unfortunately for Turkey, it does not have sufficient resources to underwrite the cost overruns for the Baku-Ceyhan route, so resolution of the issue remains outside its control.

The oil companies have indicated that they would support a Baku-Ceyhan line if the US government underwrote the up to $1.5 billion in projected cost overruns. The Clinton administration did not do so, though some officials spoke of the pipeline as a potential strategic asset.

A Baku-Ceyhan pipeline would enrich a NATO ally and be under NATO security, reduce environmental risks, support economic and political development in the producer states, and remove Caspian energy as a Kremlin bargaining chip. Money spent making Baku-Ceyhan a reality might prove a strategic bargain in the future.

Whatever the new administration decides, it must act quickly, before Azerbaijan and Kazakhstan succumb to deficits and political pressure to export their energy via Russia. The Bush administration should bear in mind that California and the Northeast have a lot of voters that will not want to see another winter like this one.

John C.K. Daly is a scholar at the Middle East Institute in Washington.

(c) Copyright 2001. The Christian Science Publishing Society

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