To future production from southern republics of the former Soviet Union (FSU), construction and revitalization of pipelines are as important as the supply of capital.
Export capacity will limit production and slow development activity in the region until new pipelines are in place.
Plenty of pipeline proposals have come forward. The problem is politics, which for every proposal so far complicates routing or financing or both.
Kazakhstan and Azerbaijan both possess world-class potential that will remain largely unfulfilled until a system is in place to move their production to distant markets.
Future volumes available for export will be a function of the oil balances in five Central Asian republics-Kazakhstan, Uzbekistan, Turkmenistan, Kyrgyzstan, and Tajikistan-and three main southern Caucasus countries-Azerbaijan, Armenia, and Georgia. Within that framework lie a host of possibilities.
In a November 1994 study called Central Asia's Oil and Gas Pipeline Network: Current and Future Flows, the East-West Center, Honolulu, said that by 2000, only Kazakhstan and Turkmenistan, among Central Asian producers, will have positive balances and thus be able to export oil. Like Azerbaijan, the likely exporter in the Caucasus region, they crave the revenues available from exports.
It's uncertain how much of those exports will go to other FSU republics and how much will need to exit the region, probably toward Europe. The split will depend on economic development of the prospective FSU importers and competition from other potential suppliers, including Russia and Iran.
Whatever the direction, transportation capacity must grow if production is to increase appreciably in the southern republics. Several pipeline projects have been proposed, each facing financial doubts and political hurdles. Russia has made clear its intention to use pipeline route decisions to retain influence in the region. As a source of external pressure, it is not alone. Iran and Turkey also have made strong bids for the southern FSU's oil and gas transport business.
Diplomacy thus will say as much as commerce does about how transportation issues are settled and how quickly the southern republics move toward their potentials to produce oil and gas.
ROUTES AND PROBLEMS
The old Soviet export system carries oil by pipelines, now in various states of repair, to Black Sea terminals at Novorossiysk and Tuapse, Russia, and Batumi, Georgia ((Fig. 1) (117094 bytes); (Fig. 2) (114034 bytes) shows the gas pipeline system). The near-term challenge is to either increase capacity of that system or add capacity elsewhere in order to accommodate production growth in Azerbaijan and Kazakhstan.
Simply increasing capacity of existing pipelines isn't likely. The strategy would increase tanker congestion in the Bosporus, a prospect to which Turkey strongly objects.
For political reasons the old pipelines could not just be looped. The pipeline around the northern coast of the Caspian Sea from Kazakhstan, for example, runs to Grozny in the breakaway Russian republic of Chechnya. Russia would want any new line to depart from the old route somewhere north of that hazard.
One way to solve the Bosporus congestion problems is to land crude somewhere in the western Black Sea for pipeline transport to ports accessible to the Mediterranean.
Russia backs a proposal to lay a pipeline from the Bulgarian port of Burgas on the Black Sea to Alexandroupolis, Greece, on the Aegean Sea. Oil would move by tanker from the Russian or Georgian ports and enter the new pipeline at Burgas. Another such strategy involves a Turkish pipeline from Kiyikoy on the Black Sea to Kbrikbana on the Aegean coast.
Costs of these proposals would be high. And opponents say they would simply move the congestion problem from the Bosporus to the Aegean.
Kazakhstan, for its part, worries about overdependence on transport through Russia for its oil exports. This concern finds an answer in another solution to the Bosporus congestion problem: an all-land pipeline route through the Caucasus region, possibly via tie-in with schemes envisioned to handle production from Azerbaijan, and across Turkey to Ceyhan or another port on the Mediterranean.
Turkey strongly supports this strategy. But any all-land route must cross the Caucasus region and will encounter political problems.
Those hurdles are high. Armenia and Azerbaijan are in conflict over Nagorno-Karabakh. Armenia has been in conflict with Turkey for centuries. Any northern detour designed to avoid Armenia would take the pipeline into strife-torn Georgia and exposure to the threat of sabotage.
And Russia does not intend to be left out of the action. When a consortium of international companies-Azerbaijan International Operating Co. (AIOC)-signed an agreement to develop three Caspian Sea fields off Azerbaijan last year, Moscow intervened to demand that any related pipeline cross Russian territory.
Similarly, Russia insists that resources of the Caspian Sea be held in common by the five countries that adjoin it. The stance is far from universally accepted, but there is room for it in the developing accord that the Caspian, technically a lake, is not subject to international sea laws.
The controversy gives Russia a way to resist an export pipeline from Kazakhstan designed to avoid Russian territory. Any such pipeline must cross the Caspian into either Iran, which is unlikely for political reasons, or Azerbaijan, where it encounters the political difficulties of Caucasus transit.
PROPOSALS
The most-advanced proposal for transport of FSU oil is that of the Caspian Pipeline Consortium (CPC).
The group involves the governments of Russia, Azerbaijan, Kazakhstan, and Oman. Its multi-government structure addresses concerns of Kazakhstan over dependence on Russia, but it so far excludes Chevron Corp., which is developing Tengiz field and wants to protect its ability to market production outside the FSU. Chevron rejected an offer for an equity stake in the consortium, saying it was being asked to shoulder a disproportionate share of the financial load.
CPC proposes to carry Tengiz oil to Novorossiysk, using existing or restored pipelines and new construction as necessary-in part to keep the route out of Chechnya. The proposal includes a spur from Azerbaijan's producing area around Baku to Novorossiysk.
Meanwhile, Turkey's Botas, the pipeline unit of Turkish Petroleum Corp. (TPAO), has been promoting routes through Turkey with an option for limited increases in tanker shipments from the Georgian port of Poti. Its proposal, Caspian-Mediterranean Pipeline (CMPL), includes plans for export of gas from Turkmenistan.
One route under discussion would pass through Nakhichevan, an Azeri enclave that a pipeline could not reach without passing through Armenian or Iranian territory. A transit agreement with Armenia would be difficult to achieve. And an Iranian bypass would disqualify the project from any financing proposals in which the U.S. government held influence.
For its part, the U.S. government has endorsed a Turkish route for Azeri and Kazakh exports. AIOC and Chevron are reported to be examining the Turkish proposals.
Iran has aggressively sought business in both Central Asia and the Caucasus. It has proposed a gas pipeline deal to Armenia that depends on financing that Armenia cannot provide and cannot acquire in the current political climate.
Iran also has signed an agreement with Turkemistan for a gas pipeline across northern Iran to carry Turkem production to Turkey and, possibly, Europe. Iran and Turkmenistan also have discussed a crude oil pipeline to Tehran. Again, U.S. efforts to isolate Iran will make financing these projects difficult.
FUTURE OIL FLOWS
Outcome of the transportation question will both affect and be affected by oil balances throughout the southern FSU. Those balances between demand, domestic production, and exports or imports for specific countries are difficult to predict. But they will be crucial to future crude flows (Fig. 3) (153850 bytes).
Similarly, countries between the FSU's Black Sea ports and the Bosporus might absorb growing quantities of FSU oil and allow exports to grow without putting new pressure on the Bosporus.
Laurent Ruseckas, FSU associate of Cambridge Energy Resarch Associates, presented that possibility at an Adam Smith Institute conference last March in Istanbul. He pointed out that Russia is exporting crude and products from its Black Sea ports at near capacity levels of 46-49 million metric tons/year. But he expects those rates to fall next year as exports to Russia's former satellites quit falling, demand bottoms out about 1997, and production falls through 1998.
Ruseckas thinks it's increasingly unlikely that there will be an export pipeline from the Caspian by 1997 or 1998. In the place of a pipeline will develop "partial solutions," such as trade growth among FSU republics; expansion of the 10 million ton/year pipeline from Atyrau, Kazakhstan, to Samara as Russian throughput at Novorossiysk declines; and Azeri production increases through oil swaps with Russia and Iran.
The outcome could be 20 million tons/year of new production available to local markets from Azerbaijan and Kazakhstan by 2000, without an export line. From those assumptions, Ruseckas projects Black Sea exports under two scenarios. The "Faster Caspian oil" scenario assumes completion of a pipeline system such as CPC's proposal with partial throughputs by 1999. The "Slower Caspian oil" scenario assumes no start to the CPC system or similar network until 2002-2004 (Table 1) (20826 bytes).
Ruseckas said importance of Black Sea markets for FSU oil could grow in this period, which could ease pressure on the Bosporus. Demand growth in Romania and Bulgaria, the traditional Black Sea importers, could combine with the start of imports by Ukraine and Turkey to triple the size of this market during 1995-2000 (Table 2) (11264 bytes).
With Russian exports slowing, rising Black Sea demand could ease Bosporus tanker traffic until after 2000, even under assumptions about rapid Caspian oil development (Table 3) (15807 bytes). Pressure on the strait will rise after 2005 as exports grow from Russia, Kazakhstan, and Azerbaijan. By then, Ruseckas says, international relationships may have settled enough to allow completion of a pipeline across Turkey and eliminate the need for a pipeline bypassing the Bosporus.
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