Andrei Konoplyanik, Doctor of
Economics, Professor, Ordzhonikidze State Management
University, President, Fund for Promoting the Development of
Energy and Investment Policies and Project Financing, Advisor,
RF Ministry of Energy, RF Ministry of Industrial Development
Anton Lobzhanidze, postgraduate,
Ordzhonikidze State Management University
A year ago the framework agreements for the
Baku-Ceyhan oil pipeline were signed during an OSCE summit in
Istanbul but 12 months later it is time to admit that the
project has stalled.
Foreign participants in Azeri oil
projects are saying, increasingly often, that the pipeline to
Ceyhan is not really needed, particularly by the leaders of
BP, one of the largest investors in the Azeri economy.
month the project lost another major potential donor —
ExxonMobil. Its top executives said, during a Washington
conference for investors in Azerbaijan, that the Baku-Ceyhan
project runs counter to their interests.
It again confirmed analysts’ doubts about the
project’s economic efficiency. In fact, the project, so
energetically lobbied by the West, may be the main impediment
in the way to the Azeri shelf’s development.
region’s geographic location, unfavourable for oil and gas
companies by being far away from the main markets, with no
access to major sea routes and the need for transit across
third countries, the many interstate and inter-ethnic
conflicts and high risks involved, especially in the field of
transport, pose tougher requirements in what concerns
substantiating the need for the laying of export
Such a transport system should meet at least
three major requirements:
a) guarantee long-term stable
b) take account of the situation in the oil
c) be economically efficient.
Stable supplies can be guaranteed by the
availability of several alternative routes, which rules out
any nation’s diktat in Caspian energy resources’ transport.
Especially so as virtually all potential transit nations are
involved in certain inter-ethnic conflicts such as Russia’s
Chechnya problem, the Kurds in Turkey or Georgia’s breakaway
In principle, all interested parties share the
view. The problem is striking a balance between pipeline
projects’ economic efficiency and minimising the risks
involved in supplying oil to the world market.
potential throughput capacity of export pipelines (existing,
under construction and planned) by far exceeds the region’s
output in the near future. As a result, only one or two new
transport projects will be realised.
The market situation is determined by supply
and demand in the main potential markets for Caspian oil.
According to forecasts for the coming decade or two, demand
will grow rapidly in Asia, while Caspian oil, if brought to
Western Europe or the Mediterranean market in substantial
amounts, can ruin the existing balance. To avoid this, at
least part of the Kazakh or Azeri oil should be directed to
alternative markets to Western Europe, such as China, the
Asia-Pacific nations, Eastern Europe and the Black Sea
As for economic efficiency, an export pipeline
system should ensure, first, maximum throughput capacity with
minimum capital investment and, second, oil transport tariffs
acceptable for companies operating in the region. In other
words, the overall level of all Caspian oil costs should
correspond to the existing and, which is particularly
important, predicted level of world prices.
We want to look at prospects for the export
of Caspian oil on the basis of two main scenarios — with a
Baku-Ceyhan pipeline and without it.
The scenario involving
Ceyhan should also be considered in two versions — with and
without upgrading and increasing the capacity of existing
routes (such as the Baku-Novorossiisk, Baku-Supsa and CPC
pipelines, Transneft’s vacant capacity on the Atyrau-Samara
section and swap schemes with Iran).
The current throughput
capacity of existing export pipelines is insufficient even for
Azerbaijan’s first consortium, AIOC — its peak output will be
somewhere between 35m and 40m tonnes a year.
The problem is whether there are real
alternatives to the Baku-Ceyhan project today.
opinion, there are such alternatives: the realisation of the
Caspian Pipeline Consortium (CPC) project, along with
modernisation of existing pipelines, will meet Azerbaijan’s
and Kazakhstan’s demand for export infrastructure for at least
five to seven years.
Rapid implementation of the
Baku-Ceyhan project with a throughput capacity of 50m tonnes a
year, will result in there being too much spare capacity
(see the chart).
The widest gap between production and
available throughput capacity would then be in 2005, when
production in the Caspian may reach around 70m tonnes of oil
(throughout this article, we are speaking of export volumes,
with no account of domestic consumption), while export
pipelines’ throughput capacity would be 140m tonnes. In
Azerbaijan, the gap will be wider than the region’s average:
production, 32m tonnes, and throughput capacity, 87m
By 2010, the gap would narrow down from 70m to 20m
tonnes for the Caspian as a whole (production, 130m tonnes,
and throughput capacity, 150m tonnes) and from 55m to 32m
tonnes for Azerbaijan (production, 55m, and throughput
capacity, 87m tonnes).
If the Baku-Ceyhan pipeline is laid while
other assets are not upgraded, the situation will be more
balanced: by 2010 Azerbaijan’s oil output and its transport
capacity will be almost equal. But this variant is inefficient
in economic terms.
If a line to Ceyhan is not laid, by 2005
the Caspian’s production volumes will be more or less equal to
the pipelines’ throughput capacity (70m and 90m tonnes
respectively), and by 2010 shortages of transport capacities
might be registered (130m and 100m tonnes respectively). The
situation will be similar for Azerbaijan: 32m tonnes and 37m
tonnes by 2005, 55m tonnes and 37m tonnes by 2010.
Obviously, this rivalry between various
transport routes for Caspian oil is, in effect, a game of who
comes first wins, because the commissioning of one or two
pipelines with throughout capacities optimal for their economy
makes the laying of yet another pipeline senseless.
obvious that Baku-Ceyhan is today the pipeline that is one too
The line bypassing Chechnya has been working since
the spring and, according to Transneft leaders, its throughput
capacity may be increased rapidly to 17m tonnes a year, when
required. As for the Baku-Supsa pipeline, if necessary, it can
be easily upgraded in 2004 or 2005.
Therefore, it is very
unlikely that the Baku-Ceyhan project can fit harmoniously in
the emerging system for Caspian oil supplies to the world
On the contrary, the advantages of the
scenario without Ceyhan are clear, the main one being that
Caspian export flows are divided up between two different
markets. From Novorossiisk or Supsa oil can be carried to the
Mediterranean and it can also be shipped to Ukraine (then to
Western and Northern Europe) and Eastern Europe (by tankers up
So, the Baku-Ceyhan project can only be
implemented if its economy is better than that of its rivals
and if it involves less risks.
Two major parameters
determining a project’s economic efficiency also need to be
looked at: throughput tariffs and capital investment.
Estimates show that in both respects Baku-Ceyhan is lagging
far behind its rivals.
According to the Istanbul accords,
the pipeline will cost $2.4bn (if its annual throughput
capacity is 50m tonnes), and planned tariffs will range from
$16 to $17.5 a tonne ($2.2-$2.4 a barrel).
In our opinion, the figures are overly
optimistic. In 1997 and 1998 Transneft specialists conducted
their own research for various throughput capacities for all
potential transport routes, including Ceyhan. They found that
investment in the laying of a pipeline to Ceyhan would be more
than $3.8bn, and tariffs would be around $33 a tonne.
if a maximum throughput capacity is chosen, throughput tariffs
on the route would be $5-$7 higher, than on the western (to
Supsa) or northern (to Novorossiisk) routes (see Oil
transport tariffs for main alternative routes). On the
contrary, both the northern and western routes are effective
even at a minimum throughput capacity of five million tonnes a
|Oil transport tariffs for main
alternative routes, $ a tonne|
|* cost of
tanker shipments to Genoa|
** extrapolated on the
basis of Transneft estimates
estimates made by the
High tariffs on the Turkey route could be
justified if risks were lower. But Baku-Ceyhan is far from
perfect — the Kurdish problem is still high on the agenda in
Turkey. Besides, as the situation in Chechnya improves, oil
transport risks on the northern route will be lower, further
worsening the Ceyhan pipe’s chances.
As for the required
investment volumes in pipelines, they range from $5.35bn to
$7.05bn for the whole of the Caspian, including:
• laying of the Baku-Ceyhan pipeline —
• upgrade of the Baku-Supsa route —
• the Chechnya by-pass line — $150m;
CPC Phase One — $2.1bn.
With no account of the Turkey route, combined
investment will range from $2.95bn to $3.25bn.
figures for Azerbaijan are $3.25bn-$4.95bn and
If we compare the share of total investment
in each pipeline project and each pipeline’s share in the
region’s throughput capacity, Baku-Ceyhan is again the loser.
While accounting for slightly over one-third of combined
throughput capacity, it will require half to two-thirds of
combined investment (see Relative weight).
of the Baku-Ceyhan pipeline in combined throughput
investment in Caspian oil
capacity, m tonnes
|Share of Baku-Ceyhan in
combined throughput capacity, %
|Share of Baku-Ceyhan in
total investment, %
Baku-Novorossiisk and Baku-Supsa are upgraded|
The accords signed during the OSCE summit in
Istanbul in November 1999 created a legal framework of the
project’s implementation but they failed to resolve the
pipeline project’s financing problems.
problems have not been tackled so far, as the project’s
profitability is open to question.
In theory, there are
four sources of investment in the project:
• the world capital market — private
investment, primarily funds of oil companies operating in
• the budgets of countries across whose
territory the pipeline would run;
• international financial
institutions (IBRD, EBRD etc);
• various government
agencies formed to encourage investment (such as US Eximbank,
None of those could be used in the
foreseeable future for the Baku-Ceyhan project.
financial resources from the world capital market is the least
politicised way, but it poses very tough requirements to
Azerbaijan can hardly be considered a first
class borrower as estimates of its oil reserves have been
reduced. Besides, investors cannot be guaranteed that by 2004
— when the pipeline’s construction is to be completed, even
though it has not begun so far, that there will be enough oil
for the pipeline to work at full capacity. But even if
Azerbaijan finds the required oil amounts somewhere, the
Turkey route should be able to compete with the western and
Unfortunately for Azerbaijan, as we showed
above, there is no scenario under which the Baku-Ceyhan
pipeline’s economy and tariffs could compete with rival
pipelines: if tariffs are high, the pipeline cannot get enough
oil, if they are low, the project’s economy sharply
It should be added that the commissioning of the
Baku-Ceyhan pipeline could wreck the oil market in Western
Europe. Annual supplies of 50m tonnes of Azeri oil, combined
with supplies by the CPC and a potential increase in Russian
exports from the Caspian would mean extra 100m tonnes a year.
This is more than 2.5 per cent of the world’s oil demand and
around 13 per cent of Western Europe’s consumption.
By way of comparison, let us recall that the
1998 price crisis broke out in the wake of OPEC’s decision to
increase production by three per cent.
In turn, a decrease
in oil prices will make the project’s pay back period much
longer, making it unacceptable in economic
Obviously, this large-scale project cannot be
financed from budgets of nations across whose territory the
pipeline would run. Neither Azerbaijan nor Georgia have enough
funds for the project, and Turkey cannot finance it alone,
especially in its current complex financial state.
As for international financial institutions,
such as the World Bank or the EBRD, practice shows that they
prefer not to get involved in low-profit, risky
Getting investment from specialised government
agencies, primarily US agencies, seems more realistic. They
might be tied loans or guarantees for tied loans issued by US
governmental financial institutions.
But numerous problems
defying solution emerge again. Positive effects for part of
the US economy are obvious — US contractors and subcontractors
are guaranteed involvement in projects to amounts usually
reaching 85 per cent of the value of tied loans. But another
part of the US economy loses.
If a project proves unprofitable, either US
oil companies will have to pay exorbitant tariffs, or the US
government will have to shift the burden on its taxpayers.
Will the US administration be prepared to explain the need for
such spending, even though the US economy has been growing
There is a further factor — changes in
forecasts concerning Caspian oil production, which may have a
serious effect on the choice of route for oil exports from the
On the one hand the outlook on Azerbaijan’s oil
reserves is now less optimistic. On the other, major reserves
in the Russian sector have been confirmed.
If the trend persists, a pipeline running to
Novorossiisk will be needed to carry Russian, not Azeri oil.
On the whole, reserves in the Russian and Kazakhstan sectors
can cover an increase in Western Europe’s demand for oil at
least until 2010. Those Caspian littoral states which are the
first to lay export routes for themselves, will be able to cut
off their rivals from the Western European market.
chances to succeed in this competition have substantially
grown during the past two years. Even though both the AIOC and
LUKOIL in the northern Caspian are expected to reach peak
production in 2007, Russia is better provided with export
But there is an alternative for big Azeri oil
to the European market — the far more capacious and rapidly
growing Asian market. The shortest distance to that market is
via Iran. The idea is not new, but until recently it had been
blocked by ‘irreconcilable’ US politicians.
Baku-Ceyhan project been even slightly more attractive for US
companies operating in the Caspian, no one would have
But in this case the economy has a chance
to show its dominance over politics. The first signs have
George W Bush, the presidential candidate,
expressing the interests of US major oil capital, said
recently that if he is elected president, he will not support
the Baku-Ceyhan project, he will lobby for the Iran route
instead, which is more beneficial in economic terms.
is an optimal variant for Caspian oil.
Kazakhstan and Russia via Novorossiisk plus small amounts of
Azeri oil via Supsa would be supplied to Europe, while the
bulk of Azeri oil would go — via Iran — to the Asia-Pacific
region, China and the Far East. This will ensure real
diversification of export routes for Caspian hydrocarbons —
besides, the Iran route is also preferable to the Turkey route
in security terms.
The use of the southern route would make the
On the one hand, Iran, being an OPEC
member, would have to obey the organisation’s decisions and
limit supplies if prices go down. On the other, as a transit
nation, it would have to ensure uninterrupted supplies from
countries that are its rivals. One possible solution would be,
for example, Azerbaijan’s joining OPEC or, if the world oil
market situation is unfavourable, some mechanisms could be
worked up to limits exports from Azerbaijan.