The Next Great Game: Players Jostle To Pipe Home a Share of the Oil Prize

Tar clots the seashore, and the smell of petroleum wafts off the water.

The proud European architecture of the turn-of-the-century boom years may be crumbling and dirty, but now wind-blown Baku, in tiny Azerbaijan, has become a global pivot point, the hub of a new geopolitical wheel.

The dry, sagey hills here recall the Mediterranean coast of Greece or southern Italy. The Arabs conquered them in the 7th century and used the oil that bubbled out of the ground as a skin salve and a weapon of war.

By the 15th-century this was a Persian city, the world's first oil town, with more than 500 oil fields. Oil was collected in leather bags and carried by camel. The courtyards of medieval stone caravansaries, inns built for travelers on the Silk Road to China, now house some fine restaurants under fig-vine arbors.

By the turn of this century, the Russians had made Baku the leading oil producer in the world. The Rockefellers and the Swedish Nobel family made fortunes here. Hitler drove his armies unsuccessfully toward Baku in World War II hoping to capture fuel.

Pursuing the prize

But now big money has moved in from the United States, Britain, Italy, Norway, France, the Persian Gulf states, and - in the past year or so - Japan. Germany and Belgium joined the surge in late May. These new players are literally building pipelines to the West that will open the vast oil reserves of the Caspian Sea, through Azerbaijan, while bypassing the regional powers here: Russia and Iran.

Some American conservatives, including former Defense Secretary Caspar Weinberger, have argued that US access to Caspian oil is more significant to long-term US strategic interests than the expansion of NATO.

Russia, to the north, has used characteristically forceful tactics to hold its position. Iran has worked hard for modest inroads. Turkey has moved in with small enterprises, but pervasively, like an army of ants. These players have battled for this turf for centuries.

Of the five Caspian states, Azerbaijan will certainly be the first to see a major field hooked up to a functioning pipeline and the spigot turned. A month or two from now, the first oil will flow from the Chirag oil field in the middle of the Caspian and begin filling the two-foot-wide, 117-mile pipe to the beach south of Baku, then travel around the Caucasus Mountains and across politically volatile southern Russia to the Black Sea ports.

Compared with the byzantine layers of Russian bureaucracy that have frustrated outside oil development, Azerbaijani bureaucracy moves on greased skids. "There's a real 'want-to' here," says James Tilley, president of one of the multinational oil consortia, in an American oil-country drawl.

No outside oil company has yet succeeded in the former Soviet Union, notes Peter Ryalls, vice president for operations at the Azerbaijan International Oil Consortium (AIOC), a 12-company, six-nation group that dominates here. "There are so many people around who don't want things to succeed."

But the Azerbaijanis, under the close control of President Heydar Aliev, have made business much more orderly and predictable.

Among the outsiders, competition for equipment and pipelines is intense, says Mr. Tilley. "There is oil here, so anywhere there's oil, there's going to be competition."

Russia may have hurt its position by playing too hard. "Russians want all oil to flow north [through Russia], says Azerbaijan's Foreign Minister Hasan Hasanov.

"They have made mistakes," says Turkish Ambassador to Azerbaijan Faruk Logoglu. "Old imperialistic methods are losers in our day and age."

They tried to force their will on Azerbaijan through hostile pressure, says a Western diplomat, "and they can see that they've shot themselves in the foot."

When Armenia occupied 20 percent of Azerbaijan, sending a million refugees into Azerbaijan territory, Russia and Iran sided with Armenia. A Russian official recently said Russia sent Armenia $1 billion in arms. Russia's motive, says Foreign Minister Hasanov, was to gain access to the region for its troops.

Then, to cut off any potential support from the south for the breakaway guerrillas in Chechnya, Russia closed its border with Azerbaijan. The result was that the Russians forced Azerbaijan to give up its long commercial links to the north and turned it to the West. Most damaging to the Russians, the AIOC - with Azerbaijan's official blessing - said that the pipeline route through Russia would only carry the first, early oil from Azerbaijani fields, and not even all of that. The big pipeline would travel straight west.

One of the longest-running diplomatic debates here is whether to treat the Caspian as a shared lake, beyond each country's coastal limit, or to divide it into territorial seas. Russia and Iran argue for shared development, which would give them veto power over questions such as pipeline routes. The Azerbaijanis are simply moving ahead as if the Caspian were a territorial sea, developing oil fields out to their boundary in the middle. On these questions, Russia's foreign policy and security establishment is at odds with its biggest oil company, Lukoil, which is joining the Azerbaijani consortia. The name of the new game in the Caspian is not imperial muscle but mutual benefit, says Ambassador Logoglu. "If Lukoil wins, everybody wins.

"I think there will be enough people in Russia who see this," he adds. "If so, Russian influence will increase. If not, it will continue to decrease."

Azerbaijan plays a touchier game of cat and mouse with Iran. The Islamic Republic is furious over the inroads that the West, especially the United States, is making into the Caspian region through Baku. The presence of American companies - prohibited by US law from doing business with Iran - has shut Iran out of the largest oil consortia here.

"Iran is pretty resentful of the pro-Western policy of Azerbaijan, says Foreign Minister Hasanov. Azerbaijani officials are even more concerned about the encroachment of fundamentalism. They cite Iranian television broadcasts from across the border and the opening of Persian-language schools as part of an effort to spread the Islamic revolution.

"Iran is trying to push the state out of its secular status," says Mr. Hasanov. There is no evidence that Iran is making headway here. The secularism of Turkey is the favored model.

Iran also sided with Russia on the most emotionally charged issue in Azerbaijan - Armenia's occupation of Azerbaijan's Nagorno-Karabakh region. A couple of millennia ago, Persian shahs used Armenia as a buffer against the Romans. Now Iran uses an alliance with Armenia to fight US and Turkish influence.

Angry about being shut out of oil consortia, Iran at one point all but closed down its border with Azerbaijan and cut off electricity to an Azeri enclave. As with similar moves by Russia, this only strengthened Azerbaijan's trade ties to the West. But to deescalate the confrontation, President Aliev let the Iranians participate in a consortium developing the Shakh Deniz offshore field. On the other hand, he shut down the Iran-backed Islamic Party in Azerbaijan last year and arrested its leader.

Iran has other reasons to be edgy. The old territory of Azerbaijan was divided between Persia and Russia in 1828 - putting two-thirds of the Azerbaijanis in modern Iran. Now that "northern" Azerbaijan is independent, Iran is ever watchful against separatist sentiment spreading to its own Azerbaijani provinces - where a quarter of Iran's population lives.

Volume to pick up fast

Offshore oil wealth has not yet transformed the economy of this small, post-Soviet country. But this is also one of the least-privatized, least-reformed economies of the former Soviet Union. And many people, says a Western diplomat, hope oil wealth will permit them to preserve their Soviet ways.

On the south side of Baku, old rigs stand in wasted acres of oily ponds. Occasionally, a Soviet oil pipe rusts through and dumps thousands of barrels before it can be patched.

The Soviet-trained engineers of the state oil company here, a partner in all the consortia, don't believe that drilling a well that took them nine months can be done in three months, until it happens. Even then, acceptance is grudging, says Ryalls.

About an hour south of Baku, lanky Houstonian Wayne Wheeler directs the final stage of preparing the Sangachal Terminal, where the pipe from the Chirag One platform hits the beach. When the first well begins to produce, probably in September, it will take from 20 to 40 days for it to fill the 117-mile pipe to shore. It will take another week or two to fill the system at the terminal here, then the oil will travel north into Russia, though Chechnya to the Black Sea for tanker transport through the Bosporus and points west.

More wells and platforms will follow. By the end of 1998, another pipeline will join old and new segments to carry oil to the Black Sea south of Russia. Eventually, the consortia will build a third pipeline three times the size of the others.

"Ideally, the best route would be straight south through Iran," says Mr. Wheeler, "but we've got six American companies involved."

* Tomorrow: A changing Iran.

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