Summer 2002 (10.2)
Hub For The 21st Century
Future Role in the Caspian Basin
by Stanley Escudero
With government service in Pakistan,
Iran, India, Egypt, as political advisor to the general commanding
American forces in the Middle East, Persian Gulf and East Africa,
and as ambassador to Tajikistan, Uzbekistan and Azerbaijan, Escudero
has spent most of his adult life in Central, South and Southwest
Asia. After retirement from Foreign Service in the fall of 2000
and the prompt discovery that he loathed the inactivity of retirement,
he opened a small consulting firm and quickly discovered an extensive
demand for his expertise. Within a few months, he found himself
spending more time in Azerbaijan than in the United States and,
by late summer of 2001, three of his clients had persuaded him
and his wife, Jaye, to move back to Baku permanently. Now, as
a member of the Boards of Moncrief Oil International and the
U.S.-Azerbaijan Chamber of Commerce (USACC), First Vice President
of the American Chamber of Commerce (AmCham) in Baku and with
a range of clients that includes several of the most active foreign
investors in Azerbaijan's non-energy sector, Escudero is back
in the thick of things, relishing his second career.
Here he poses an interesting question: given that two nearby
countries, Kazakhstan and Turkmenistan, have a great deal of
oil and gas to get out to the world market, how can Azerbaijan
get involved and facilitate the larger development of the region?
He argues that Azerbaijan is uniquely poised to serve as a major
hub for regional transportation, business services, light manufacturing,
warehouse storage and agriculture. But for this to happen, Escudero
says, Azerbaijan must first take major steps to encourage serious
Below: Clockwise, from top: Baku's bustling
Fountain Square serves as a reminder that the city is back on
its feet and thoroughly modern.
Baku has every prospect of developing
into the same kind of regional support center that Dubai has
become in the Persian Gulf.This development is absolutely inevitable,
provided that the conditions are there to make it attractive
for investment to jumpstart the process.
What are the possibilities
for the future of the Caspian basin? I think they are quite extraordinary,
due to the vast energy reserves that exist in and around the
Caspian. Azerbaijan is sure to profit not only from its own oil
and gas resources, but also from the activities of some of the
other countries that border the Caspian.
For instance, huge amounts of oil have
already been discovered and are continuing to be discovered in
Right: Baku's new airport
will see even more activity if the city becomes a regional transportation
hub for the Caspian region.
There is the giant Tengiz
onshore field, which is typically described as a 10-billion-barrel
field, although my understanding is that they haven't yet plumbed
the depths of this field.
Add to that the Kashagan field, the largest offshore field in
the Caspian, located in waters that belong to Kazakhstan. This
is the largest single oil find of the last 30 or 40 years. Kazakhstan
has large gas fields as well. In short, the western part of the
country has a very large amount of oil and gas. Turkmenistan,
too, has enormous gas reserves. But even though these two Eastern
countries have a great deal of oil and gas, they have not yet
figured out how to get all of it out to the world market.
Turkmenistan in particular has experienced some difficulties
in developing marketing arrangements for all of its gas. Personally,
I think that this country made a big mistake in not going along
with the United States' proposal for a Trans-Caspian Pipeline.
This proposal would have enabled Turkmenistan to move its gas
directly to the Turkish market at a higher price than it receives
from Russia. But the Turkmens were never able to reach an agreement.
Perhaps they thought that they could rely on other export routes
for their gas and didn't realize that for them, as for the other
countries in this part of the world, multiple pipelines is the
best insurance of access to future markets.
Left: Baku's Television and Radio Tower.
would be to resurrect the old gas pipeline project that was supposed
to go from Turkmenistan to Afghanistan, to Pakistan and Western
India. This idea was discussed some years ago in association
with Unocal, but was later abandoned because it was not possible
to construct and maintain a pipeline through Afghanistan while
the Taliban was in power. Now that the political situation has
changed, this pipeline may once again become a possibility.
Northwestern India has a substantial industrial base but is chronically
short of gas because it doesn't produce its own. This area would
benefit from Turkmen gas if it could be brought down through
Pakistan. And, of course, the intervening states - Afghanistan
and Pakistan - would benefit from transit fees. Additionally,
and despite recent discoveries of more gas in Pakistan beyond
its depleted Suigas fields, Pakistan would also be able to make
use of some of the gas carried in such a pipeline.
It would be a very good regional development project to resurrect,
given the political changes in the region, the problems between
India and Pakistan notwithstanding. But it will not happen tomorrow,
regrettably. Like any other international project in the oil
and gas business, it would require extensive preparationnot
just to deal with technical issues of construction and performance,
but to ensure financing and resolve the tricky issues posed by
the need to construct and operate the pipeline across the territories
of four nations. I would guess that it would take five to 10
years, at least.
So how will the oil and gas from Kazakhstan and Turkmenistan
get out? The production of Kazakhstan's Tengiz field is already
committed to the Caspian Petroleum Consortium (CPC) line, which
is an enormous line that's already begun to move oil. The CPC
line goes around the northern coast of the Caspian from Kazakhstan
into Russia and then over to the Black Sea coast at Novorossiysk.
There the oil is loaded onto tankers and sent off to market,
either to Black Sea ports or via the Bosphorus.
right: ISR Plaza is one
of Baku's most prestigious office buildings.
However, this CPC line is not large
enough to handle the total production of Tengiz, Kashagan and
the other fields in Kazakhstan. The CPC line's planned maximum
capacity is only about 1.3 million barrels per day. But the anticipated
production of the Kashagan field alone could conceivably reach
6 million barrels a day. Either the CPC pipeline will have to
be expanded, or Kazakhstan will have to find additional ways
to move this large volume of oil to market.
One problem with expanding the CPC pipeline is that large volumes
of oil are already passing through the narrow Bosphorus Straits
at Istanbul. More congested tanker traffic would mean an increase
in the risk of an environmental catastrophe and closure of the
Straits. In light of the opposition of the government of Turkey
to the possibility that Caspian oil could pass through the Bosphorus
in large amounts, I predict that Ankara will pose similar objections
to any proposal for substantial increases in CPC or any other
oil if it is to exit the Black Sea via the Bosphorus.
I believe that Kazakhstan sees the necessity for alternate export
routes. It could export a certain amount of oil to the south
into Iran and probably should, from Kazakhstan's point of view.
The crude oil would go through Turkmenistan and then come down
in a pipeline or by tanker to the Iranian Caspian Sea port of
Nekaa, and then through a pipeline that the Iranians are building
from Nekaa to Tehran. From Tehran, it would go to the Northern
Iranian refineries at Rey (near Tehran), Arak, Tabriz and possibly
Isfahan. But this possible export route would still only move
400,000 barrels a day.
Baku - Ceyhan Pipeline
You then have to ask yourself, "What are the Kazakhs going
to do with the rest of their oil?" This is where Azerbaijan
fits in. Tankers could move the oil from Kazakhstan to Azerbaijan.
Then it would be placed either in pipelines, if there is sufficient
capacity, or moved by rail eventually to Turkey's Mediterranean
port of Ceyhan [pronounced Jeyhan] via the Baku-Tbilisi-Ceyhan
Azerbaijan was a huge agricultural
supplier during the Soviet era, so today products like these
cherries could easily be exported to nearby countries.
This idea has already been discussed
but not yet approved. Azerbaijani oil will start moving through
the BTC line in late 2005 or early 2006. By then, the ACG fields
[Azeri-Chirag-Gunashli, being developed by the Azerbaijan International
Operating Company] will be producing enough oil to fill that
line. With the eventual addition of oil from Kazakhstan or Turkmenistan,
not to mention additional Azerbaijani production, this pipeline
will need to be enlarged.
One way to do this would be to add pumping stations and slicking
agents. Crude oil exerts friction on a pipeline as it moves through
it, slowing down the progress of the oil. Pumping stations increase
the pressure and keep the oil moving along faster. Slicking agents
reduce the friction of the crude oil in the pipeline, also increasing
the speed. That way, you can move greater volumes through the
pipeline, provided the line is strong enough to withstand the
But the capacity of the Baku-Ceyhan pipeline can only be expanded
by so much. Another system will have to be developed to move
the additional oil produced in the Caspian Basin to market. The
most intelligent thing to do would be to build a parallel line,
right alongside the BTC line.
There are obvious economic advantages to using this same route.
Most of the land has already been acquired. Plus, the basic negotiations
have already been undertaken and completed to construct and operate
an oil pipeline along this particular route through the countries
involved. So the entire process would be much simpler and quicker
the second time around. The second pipeline would cost much less,
simply because a number of related costs aren't there. Of course,
it would take some time to renegotiate the transit fees.
A certain amount of oil already crosses the Caspian by tanker
and is moved by rail via Azerbaijan to Batumi, Georgia, a port
on the Black Sea. What I anticipate would happen is that there
would be greater tanker traffic moving oil to Baku and then from
there initially to Batumi, until the BTC pipeline is constructed.
However, the amount of oil produced in the eastern Caspian will
soon exceed the capacity of Caspian tankers and approach the
point at which the construction of a trans-Caspian oil pipeline
will become necessary.
Once the companies in Kazakhstan are sure that they are going
to reach 500,000 barrels a day, they will begin, I believe, preparations
for the construction of a Trans-Caspian pipeline. This would
move oil across the Caspian to the region of Baku and then join
into an enlarged BTC pipeline. But eventually, a parallel BTC
pipeline will be needed to move this eastern Caspian oil.
Will that happen? Yes, it almost certainly will. How soon? That's
not clear. It takes a long time to develop an oil field, even
one that is known to be massive, like Kashagan. It's not so easy
to develop oil in the Northern Caspian. It freezes in the wintertime.
The oil is heavy in the sense that it has sulfides and other
things that have to be taken out before it's moved. Too much
paraffin, sulfides and heavy metals in the oil would foul the
pipeline. It's cheaper to get that stuff out at the front end
of the pipeline.
Another difficulty is that these vast reservoirs of oil and gas
in the Eastern Caspian are found along undeveloped coastal areas.
Kazakhstan's developed areas are much farther to the east, around
Almaty and the new capital, Astana. In Turkmenistan, Ashgabat
is about the only place that has any development.
So the areas of the Eastern Caspian where oil and gas are found
do not have sufficient infrastructure to serve as a support base
for the oil and gas activities. The little infrastructure that
does exist, other than what has recently been constructed by
the oil companies, is in an old and somewhat decrepit state.
The development of any region like the Caspian Basin requires
certain types of support, not only of its oil and gas activities,
but all kinds of other related activities. First of all, the
area will need regional transportation - a regional airline,
for example, that moves not only people, but more importantly,
cargo, in grasshopper jumps all around the Caspian.
Compared to the small, primitive towns along the Eastern Caspian,
Baku is in an ideal position to provide these types of support
services. If this were a horse race, Baku would already be half
a track ahead.
Every one of those large oil companies is going to need a regional
office. In Baku, that kind of support infrastructure already
exists. There is modern office space available, easy access to
transportation routes, functioning water and electrical systems
and new construction going on all around the city. Baku could
put itself into a position to provide telecommunications, broadband
connections and fiber optics links, including dedicated satellite
links for the region.
And most importantly, all of these companies will need to be
tied to the international banking structure. We're talking about
companies that are worth more than most countries. Azerbaijani
banks have the capacity to provide international commercial banking
services, provided that they can partner with foreign banks that
already have a presence here. But in order for Baku to become
a regional banking center, Azerbaijan will have to make changes
in its banking laws and practices. The absence of such reforms
is already running counter to Azerbaijani and regional interests
and has led at least two foreign banks to pull up stakes.
Another reason companies would be interested in locating their
regional headquarters here is that, unlike other cities to the
east, Baku is not a primitive oil town. Baku is an ancient, cultured
city with a great deal to offer. In addition to the tourist sites
that one visits here - like Gobustan or the Shirvanshah Palace
- there are cultural offerings like opera, ballet and jazz.
Plus, everyone here is learning to speak English. When I first
came here only four years ago, it was difficult to find people
who spoke English. Now it's quite common. Today when you hire
office staff, you assume that the applicants know English in
addition to Azeri and Russian, and that they have basic computer
A number of Azerbaijanis are coming back from Western universities
with MBAs [Master in Business Administration]. So the area is
beginning to get trained people who can assume responsibility,
not just in the office as executive secretaries, but also in
the upper levels of management.
In terms of light manufacturing, Azerbaijan has the potential
to produce a considerable amount of dependable oil production
equipment. In Soviet times, Azerbaijan produced 70-80 percent
of all the support equipment for the Soviet Union's oil industry.
And in those days, the Soviets were producing 12.5 million barrels
of oil a day.
During the Soviet era, this equipment was being produced according
to Soviet standards, not the more stringent American Petroleum
Institute (API) standards. But with minimum retraining, Azerbaijani
workers could be taught to produce equipment according to the
API standards followed around the world. The old factories that
have deteriorated and become decrepit could be rehabilitated
Here in Azerbaijan, it would be possible to produce relatively
simple items, like sucker rods, to supply the entire Caspian
basin oil industry. Otherwise, these items would have to be imported
from Europe or the United States at substantially higher prices.
In other words, it is possible to resurrect much of the old Soviet-era
industry, initially on the low-tech end, at a cost that is profitable
to both Azerbaijan and the oil companies.
Azerbaijan has access to major transportation routes, which enables
Westerners to come and go more easily here than they can in places
farther east. With this in mind, bonded warehouse storage is
another area in which Azerbaijan could be helpful and supportive
in the development of the rest of the region. Items could be
moved here cheaply and stored in a large system of bonded warehouses
for protection against theft, loss or misappropriation in one
form or another.
In this way, companies could delay paying taxes and customs duties
on items that they keep in these bonded warehouses. Let's say
I want to import 10,000 tables but only have an immediate market
for 1,000. I could save the cost of moving smaller volumes of
my tables by bringing in 10,000 at a time and putting them in
my bonded warehouse. I could also save on the initial outlay
of paying customs and taxes on 9,000 of those tables until I
am actually ready to sell them.
There are also certain savings of scale. Let's say that 20 different
companies all use gloves or boots in the course of their operations,
which might involve construction, oil development or any number
of things. Each one of those companies could import the boots
and gloves separately. But if they own or share a single warehousing
operation, they could realize substantial economies of scale.
Or, they could contract separately to bring in what they need,
store it in the warehouse and have it available as they need
During the Soviet era, Azerbaijan was a huge supplier of early
spring vegetables, flowers and other fruits and vegetables to
the rest of the Soviet Union. With its broad range of climatic
zones, it is equipped to do that again for the Caspian basin.
But first, Azerbaijan's agricultural system needs to be redeveloped.
The government needs to focus on the development of food products
that can be produced, canned and exported - not just to Turkey,
but also to the east. There is a rapidly developing commercial
supply industry for food. In the Kazakh ports of Aktau and Atyrau,
for instance, lots of things are being flown in from Dubai and
being sold in grocery stores.
Why shouldn't such agricultural products be produced to an international
standard here in Azerbaijan? They could easily be shipped via
tanker or ferry across the Caspian to these same stores in Aktau
and Atyrau. The price would be cheaper, and the quality would
be just as good.
So why hasn't it happened? Primarily because the sufficient conditions
for attracting and supporting the foreign investment needed to
make these things happen have not been fully developed.
Azerbaijan must create an attractive environment for international
investment. The government needs to take every conceivable step
it can to guarantee success. Attract the investors, get them
in here, let them work, help them to make a success and then
use them as showcases to attract other investors.
For this to happen, the Azerbaijani government needs to make
decisions in close coordination with foreign companies, addressing
questions like privatization, the cost of acquiring a given company
and the right to produce a given thing. If an old Soviet-era
company has past debts, assuming them could be ruinous for a
new investor. If the old company incurred environmental liabilities,
the new investor cannot be expected to take on the responsibility
Likewise, new investors cannot be expected to hire all of an
old company's former employees. In Soviet times, companies employed
many, many more people than they actually needed because the
object was to have 100 percent employment. It didn't really matter
what the cost was because the market influences were irrelevant.
That's one of the main reasons why the Soviet Union fell apart.
New investor companies cannot be expected to maintain thousands
of workers more than necessary. Some reasonable arrangement has
to be made so that some of the old workers can be pensioned off
while the others are kept and retrained.
The government also needs to grant tax holidays, meaning that
if you come in and make an investment, you don't start paying
taxes until a certain number of years have passed or you have
amortized your initial investment and made some degree of profit.
Based on the past track record of the region, firms that invest
in Azerbaijan are taking a considerable risk. That risk must
be reduced or they won't be interested in coming.
There's also the question of financing. It's conceivable that
Azerbaijan might want to use some portion of its Oil Fund to
assist reputable companies with good investment and development
plans. The Oil Fund could buy shares in a project but not actually
try to control the project. After a number of years, if the company
has succeeded, these shares would be worth much more than they
were initially and could be resold at a profit to the Fund.
If the project fails, however, the company is off the hook for
the amount that the Oil Fund has invested. This gives the Oil
Fund, and therefore the government of Azerbaijan, an additional
interest in seeing that the project survives and is successful,
while at the same time reducing risk to the foreign investors.
All of these things can be done and ought to be done if the investment
that Azerbaijan so desperately needs is to take place. Potential
investors need to feel very comfortable about exploring the region's
opportunities; there has to be a degree of predictability for
I see Azerbaijan as a future hub, not just for the South Caucasus,
but for the entire Caspian basin. The other two countries of
the South Caucasus [Georgia and Armenia] lack Azerbaijan's resource
base and must share its geographic location on the East-West
transport route. Therefore, these two nations will only benefit
to the degree that Azerbaijan benefits first.
As Azerbaijan develops and becomes a major hub for transportation,
banking activities, administrative support, light manufacturing,
warehouse storage and almost anything you'd care to mention,
initially Georgia and, perhaps - if there is peace in Nagorno-Karabakh-Armenia,
will benefit. If Azerbaijan does not serve as the development
engine for these other two South Caucasus nations, they have
very little prospect of taking part in the broader development
and prosperity of the Caspian basin.
Azerbaijan is on the cusp of a very rapid development on the
basis of its own energy resources, which will become more substantial
as exploration continues. Plus, Baku has every prospect of developing
into the same kind of regional support center that Dubai has
become in the Persian Gulf, or Beirut once was before the wars
and may become again. This development is absolutely inevitable,
provided that the conditions are there to make it attractive
for investment to jumpstart the process. It may take 10 to 15
years. But 10 to 15 years pass in the blink of an eye.
Stan Escudero, former U.S. Ambassador
to Azerbaijan, was interviewed for this article by Azerbaijan
International's Editor, Betty Blair. For previous articles by
Escudero, see "Hands
Tied: Denying Aid to Baku - Section 907" in AI 8.4
(Winter 2000) and "Visions
of Baku: Future Hub of the Caspian" in AI
9.3 (Autumn 2001). SEARCH at AZER.com.
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