The change of administration in the US provides an opportunity for Washington to review a confused Caspian Sea policy. US Caspian Sea policy has strayed from the original parameters set by President Clinton in May 1998. The result has been the invention of pipeline proposals that are based more on politics than economics, and act as a source of tension among governments and western oil companies.
President Clinton said in May 1998 that pipelines should be financed by the private sector, and be commercially viable. Since then, however, the US State Department has altered policy into one of promoting any oil or gas export pipeline that will avoid crossing Russia or Iran. This policy, which is a different from President Clinton's initial vision, is mostly political, designed to further isolate Iran while pushing Russian influence out of the Caspian Sea.
There is a degree of economic logic to this State Department approach. Both Russia and Iran are competitors in the oil and gas markets of Caspian Sea exporters -- Azerbaijan, Kazakhstan and Turkmenistan. Russia and Iran would probably not hesitate to restrict Azerbaijani, Kazakh or Turkmen oil and gas exports, if they felt that these upcoming rivals from the Caspian Sea were eating into their markets.
The main pipeline proposal being pushed by the State Department has been the Baku-Ceyhan oil export pipeline, to run from Azerbaijan to Georgia and then finally to the Turkish Mediterranean oil terminal at Ceyhan. On paper the proposal looks good: it avoids Russia and Iran, and ends in Turkey, a western ally and energy importer with no reason to restrict Caspian Sea energy exports.
The problem has long been that few in the oil and gas industry believe that Baku-Ceyhan is commercially viable. Most firms in the Azerbaijan International Operating Company (AIOC), the main foreign oil consortium in Azerbaijan, have yet to commit oil to Baku-Ceyhan. Baku-Ceyhan is to have capacity of 1 million barrels per day (b/d), yet AIOC will only produce 800,000 b/d at its peak. Three AIOC firms, Exxon Mobil (USA), LUKoil (Russia) and Pennzoil (USA), seem set to shun the pipeline altogether, reducing total potential AIOC throughput to 616,000 b/d.
Claims that Kazakh oil will make up the gap are premature. An accurate estimate of reserves in Kazakhstan's claimed offshore sector will not be available until the end of 2002. Even then, an additional pipeline would have to be built from the Kazakh-claimed oilfields in the northeastern Caspian Sea to Baku, costing yet more money on top of the $2.4 billion to $3.7 billion estimated for Baku-Ceyhan.
Oil industry sources have repeatedly pointed out that if Baku-Ceyhan were commercially viable, then it would already have been built. Amoco (USA), before its merger with BP (UK), claimed that Baku-Ceyhan would need $200 million per year in subsidies from the US government to be viable. Rather than engage with the oil companies and take account of the independent studies which have criticised Baku-Ceyhan, the State Department has instead tried to pressure them into paying for a pipeline they do not want. There is an irony here. On the one hand, the US government preaches the virtues of the free market and privatisation to former Communist countries, yet the same US government is trying to force privately-owned western oil companies to build a pipeline that suits its political convenience more than the best interests of these companies' shareholders.
By repeatedly stressing that Baku-Ceyhan is commercially viable, the State Department has undermined relations among, on the one hand, the governments of Azerbaijan and Turkey and, on the other, western oil companies such as BP Amoco and Exxon-Mobil. The State Department has encouraged officials in Azerbaijan and Turkey to believe that BP Amoco and Exxon-Mobil's skepticism about Baku-Ceyhan is not well founded.
The problem is that what the US government says tends to be taken much more seriously outside the US than within. Many oil industry analysts tend to react with skepticism to claims made by US officials concerning the Caspian Sea, including an assertion that there are 200 billion barrels of oil reserves in the Caspian Sea. Unfortunately, officials in the region take such claims at face value, concluding that the US government knows something that they do not. Similarly, when the State Department tells them that Baku-Ceyhan is commercially viable, the governments conclude, wrongly, that the State Department knows more about oil export pipelines than BP Amoco or Exxon-Mobil.
Most of the oil companies in AIOC have now formed a "sponsor group" that will undertake a series of studies on the pipeline's viability. These will conveniently postpone any final decision for another eighteen months, by which time everybody will have forgotten the already missed March 1998 deadline for a decision on whether to build Baku-Ceyhan, and the primacy of commercial over political considerations will perhaps have won out.
Andrew Apostolou is a historian at St. Antonys College, Oxford.