17:35 GMT +310 December 2016
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    BAKU-TBILISI-CEYHAN PIPELINE COULD CAUSE OIL PRICE SLIDE IN EUROPE

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    Vasily ZUBKOV, RIA Novosti economic observer

    The Transneft oil company has increasingly becoming the focus of attention with regard to the construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. The world's largest state-run oil company has come under fire for "detrimental" activity, financing international environmental organisations, unfair competition and inflated tariffs. In a word, the company has been criticised for everything that "interferes with the successful construction of the oil pipeline from the Caucasus to the Mediterranean."

    "Transport routes for hydrocarbons to the international market sparked off severe competition among trans-national companies," says Sergei Grigoryev, Transneft vice president. "Russia understands and shares the ambitions of its neighbouring oil extracting countries to diversify their export flows to reduce potential risks. Each country is completely within its rights to build anything it likes. But international co-operation should encourage economic growth for all members of the international community."

    According to the Transneft senior manager, this is especially true for the oil and gas sectors of the CIS countries where production is particularly dependent on internationalisation. Russia inherited a unique and highly efficient pipeline grid with a potential to carry over 600 million tonnes from the Soviet Union. This is a highly integrated oil transportation network that yields profit through oil transits.

    Mr Grigoryev is convinced that hydrocarbon transportation through the available pipelines and the creation of new promising routes is a priority way for Russia to develop economic co-operation with the Caspian states.

    It is no secret that Russia's economy is growing, largely due to the oil and gas sector. According to initial reports, Russia extracted over 421 million tonnes of oil with gas condensate in 2003. Transneft pumped through its systems about 415 million tonnes, which is 11% more than in 2002. Nearly 210 million tonnes of oil were exported to other countries. According to expert estimates, this year Russia is expected to extract 432 million tonnes of oil, with its transportation set to increase accordingly.

    Transneft is convinced that Russia's economic interests can only be harmonised with a commitment to strategic partnership with its neighbours, including in the Transcaucasus, on the basis of mutual pragmatism, economic considerations and profits.

    By way of example, the Transneft vice president cited relations with Kazakhstan. In 2003, this country transported 32 million tonnes of oil through Russian territory. According to Kazakh leader Nursultan Nazarbayev, Russia is the country's leading partner in terms of Kazakh oil transit to the international market. During Vladimir Putin's recent visit to Astana, the sides made a commitment to further bilateral interaction in the fuel and energy sector and, in particular, in the Russian transit of hydrocarbons to the international market.

    Likewise, relations with Azerbaijan are developing in the same vein. Sergei Grigoryev noted that Transneft had never had any serious problems with Azerbaijani oil transits via the Baku-Novorossiisk pipeline. The Russian side is strictly meeting its obligations contained in a 1996 intergovernmental agreement on oil transit. Originally, the Azerbaijani side planned to transit up to 5 million tonnes of oil annually. So far, though, it has not exceeded 2.5 million despite the fact that the potential is far greater. In comparison, the entire volume of oil extracted last year in Azerbaijan was 15.38 million tonnes.

    When asked to comment on Russia's "reluctance" to miss out on the "lucrative transit", Grigoryev stressed, "the loss of Azerbaijani oil, which is a little over 1% of Transneft's total exports, would not be so crucial. Plus, this shortage can easily be compensated by Russian and Kazakh oil structures interested in more access to Transneft's oil routes."

    The idea to lay the Baku-Tbilisi-Ceyhan pipeline appeared in Turkey in the early 1980s and was immediately supported by the United States. It was initially planned to force Iran out of the international market, and then, in the wake of the USSR's disintegration, to distance Baku from Moscow. The authors of the project made no secret of its political dimension, but experts emphasised that in economic terms it was too expensive and risky. Now that the war in Iraq is over and its oil (cheaper than that of Azerbaijan) is under total control, Washington's enthusiasm seems to be waning.

    Plus, there are serious financial obstacles. Reportedly, only 20% of the $3 billion needed has been raised. There are several reasons behind this weak investment activity. One of them- the increasing export of Iraqi oil - was voiced at a recent oil and gas conference in Istanbul. This drastically alters the regional investment climate and reduces the new project's chances of success. The prospect of greater access to Iraqi energy supplies could push creditors to review their position on the comparatively expensive projects on the Caspian shelf and plans to further lay the BTC pipeline.

    Moreover, the International Financial Corporation, a major investor in the project, is insisting that environmental concerns raised by the pipeline's route through Georgia's unique Borzhomi valley, famed for its mineral water, be clarified.

    There is a serious danger that the pipeline will not be commissioned. Transneft believes that the high seismic activity in the mountain areas where it is expected to pass requires building skills of the highest class and unique equipment and technologies, which do come not cheap.

    The possible failure to meet the deadline in commissioning the pipeline could, in turn, place the project's future in doubt. A potential participant in the project, Kazakhstan, will then look for other solutions. Uzakbai Karabalin, head of KazMunaigaz, for example, declared that his country would like to work with oil giants to build an oil pipeline to export oil from Kashagan through the Caspian pipeline consortium via Novorossiisk.

    Oil exports to China and Iran are equally promising for Astana. Besides, in early January 2004, Vladimir Putin and Nursultan Nazarbayev declared that Russia and Kazakhstan had joint oil transportation plans and stated that they were ready to discuss the Baltic and Northern routes.

    As for the future rates on the BTC pipeline, Sergei Grigoryev said that Transneft experts had conducted research into the Ceyhan direction in the late 1990s. According to their calculations, given that 50 million tonnes should flow through the pipeline every year, the transport tariff should be $33 per tonne, or 5-7% higher than on the Novorossiisk route. Besides, investment in the project is expected to be $1 billion higher than had been originally planned.

    There is another delicate aspect here which politicians and reporters prefer to play down. Russian and foreign oil producers have huge doubts about the possibility of doubling Baku's oil extraction from the current 15 million tonnes to 32 million, before reaching 50 million tonnes in five to six years. Moreover, there is an opinion that the Azerbaijani section of the Caspian might have less oil than geologists expected.

    British Petroleum, for instance, forecasts that Azerbaijani oil will last 67 years, given the current extraction norms. However, if extraction is trebled by 2010, the Caspian's oil will be exhausted in 20 years, while the project is expected to pay back only 40 years later. There are some other aspects contradicting over-optimistic forecasts with regard to Caspian oil.

    Even if the Caspian shelf plans do come true, the new pipeline risks to cause a slide in European oil prices. By 2005, annual supplies of 30-40 million of Azerbaijani oil, 28 million of Kazakh oil, 15-18 million additional tonnes of Russian oil from the Timano-Pechora deposits and some significant amounts of the Iraqi oil cannot but over-saturate the European oil market. Meanwhile, experts estimate the growth in Europe's oil needs, even in view of falling North Sea extraction, at no more than 80-84 million tonnes.

    The next few months will show how the situation will develop in Azerbaijan and Georgia with the advent of new leaders and the policy they opt for with regard to Russia.

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