Spring 1995 (3.1)
Azerbaijan's Oil Pipeline Route: Turkey Gains Edge
by Masoud Javadi and Nasser Sagheb
Although no final decision has been made as to which pipeline route or routes will carry Azerbaijan's Caspian oil and gas to industrialized markets, recent developments have given the Turkish option a decided edge. Three factors have contributed to this development. First, Turkey is offering to finance construction of a pipeline inside Turkey and, if necessary, the laying of pipelines outside Turkey. Secondly, the Russian attack on Chechnya has made the pipeline route through Russia leading to the Black Sea port of Novorossisk less attractive. Finally, the United States has formally backed the Turkish pipeline route.
The Consortium Contract
Last September, Azerbaijan and a consortium of ten foreign oil companies signed a production sharing contract in Baku to invest 7.4 billion dollars to develop Azerbaijan's Caspian Sea oil reserves for the offshore fields of Azeri, Chirag, and Guneshli. Since then, Iran has offered to purchase a quarter of the 20% stake of State Oil Company of Azerbaijan Republic (SOCAR). Should the proposal be accepted, Iran's share in the consortium would be 5%. Sources familiar with the negotiations claim that Azerbaijan would like Iran to provide SOCAR with $360 million which would be used for SOCAR's capital commitments as a Consortium member (SOCAR's overall investment share is 1.4 billion). However, cash-strapped Iran may not be able to secure such funds at this time either.
Another twist to recent events has been the report that several other major international oil companies such as Exxon, Mobil, Shell, Elf Aquitaine (French) and AGIP (Italian) have entered into negotiations with Azerbaijan and are either looking to purchase a portion of SOCAR's stake in the Consortium or to organize a separate consortium for development of other oil reserves not included in the present agreement.
Getting Oil Out
The Consortium agreement calls for construction of a pipeline within 54 months. From the beginning, the most logical choice, given Azerbaijan's geopolitical situation, was to reach the Mediterranean Sea via Turkey. This pipeline would carry oil from Baku via Armenia or Iran, through Nakhchivan to Turkey, and then connect with the existing Turkish-Iraqi pipeline (now unused), ending at the Mediterranean port of Ceyhan. Another feasible alternative was LUKoil's proposal to route the oil via Russia to the Black Sea port of Novorossisk.
The choice of using the Persian Gulf pipeline route was ruled out earlier given Iran's international status and objections by the U.S. government. Similarly, a proposal to rebuild an old pipeline through Georgia to the Black Sea, which would be the shortest overland route, has practically been ruled out because of the civil war there.
Chechnya and the Russian Proposal
Until a few months ago, a pipeline through Russia was a strong contender for Azerbaijan's oil. However, the conflict in Chechnya has seriously undermined this proposal since the original plan directed the pipeline through Chechnya which already is a hub for area pipelines because of its own oil production and refining industry. The Russian government has repeatedly tried to convince the international oil companies that it would have full control of Chechnya in a very short time. But since they have not been able to secure the area, they have begun scrambling to propose alternative routes that would bypass Chechnya altogether such as in building an undersea pipeline in the Caspian that would join up with the Novorossisk pipeline in Kazakhstan.
Most experts do not believe it is realistic to assume that Chechnya will ever be a secure route. In a speech made at the Carnegie Mellon Foundation in January, the Foreign Minister of Chechnya, Yousef Shamsaddin, clearly stated his countrymen's resolve in opposing Russian forces. Thus, even if Russia were to gain control of the region, resistance forces are likely to continue to wreak havoc in the area and jeopardize any flow of oil. Ironically, Mr. Shamsaddin is convinced that the Chechnya conflict is directly related to Russia's interest in profiting from Azerbaijan's oil. The attack on Chechnya came three years after an on-again, off-again conflict with Russia.
Nevertheless Azerbaijani officials now appear to have a reason for not choosing Russia's pipeline although they cannot ignore Russia altogether as they need to utilize Russia's Volga-Don Canal system to transport heavy construction materials to the Caspian.
U.S. Foreign Policy and Iran
In a statement released by U.S. Ambassador Mark Grossman in Ankara on January 31, 1995, the United States government threw its weight and support behind the Baku-Armenia-Turkey route. The U.S. prefers this route as it would accelerate the peace process and bring an end to the Azerbaijani-Armenian conflict, the single most important obstacle for this route.
Despite U.S. efforts to keep Iran out of the picture, it appears that this may be an unrealistic expectation. Because of the Azerbaijani-Armenian conflict and the possibility of future disputes, the Azerbaijani government is considering a plan that would safeguard against any possible disruption in the exportation of its oil.
Therefore, Azerbaijan is now considering not only the route through the narrow 46 kilometer strip of Armenia which separates Azerbaijan mainland from Azerbaijan's Autonomous Republic of Nakhchivan, but also a parallel pipeline through Iran as well. Comparatively speaking, this would be a minimal investment greatly reducing Azerbaijan's risks vis-a-vis Armenia. Although the current cease-fire between Azerbaijan and Armenia has lasted nine months, permanent peace is still far from certain.
Furthermore, some Azerbaijanis view Iranian involvement as a politically expedient move, since Iran is a regional political power and has become Azerbaijan's largest trading partner. Iran could play a balancing role as Azerbaijan seeks further detachment from Moscow's control. Finally, Azerbaijan might benefit from Iran's experiences in the exploration, transportation and marketing of crude oil.
The U.S. government is clearly against any route through Iranian territories and the participation of Iran in Azerbaijan's contract with foreign oil companies. This opposition was put forth by the U.S. Embassy in Azerbaijan on January 25. But the embassy softened its statement by noting that they could not force American companies to pull out of the Consortium. According to Azerbaijan's Ambassador to the U.S., Hafiz Pashayev, however, the decision to build the additional Iranian route is not so much about Azerbaijan's sovereign right to deal with whomever it chooses, but about the possible difficulties it may face in trying to secure financing for the project if the U.S. does not support its plans.
Allegedly, if American companies "do" business with Iran, they are not eligible for any financial support from the US government, such tax credits for investments or loan guarantees from the Export-Import Bank. The U.S. would also be obligated to vote against loans to the project from international financial institutions to which it belongs, such as the World Bank.
Turkey's Financial Offer
Another development that has pushed the Turkish pipeline option into the forefront is Turkey's offer to finance the construction of the pipeline carrying Azerbaijan's oil. On January 24, the Turkish Embassy in Washington, D.C., issued a statement that the Turkish government had proposed to build a pipeline that could carry Azerbaijani and even Kazakh oil. The pipeline could start in West Kazakhstan, pass through Baku and end at the Mediterranean port of Ceyhan. The sweetener for this proposal was the suggestion that Turkey is ready to finance the whole project if necessary.
The choice of Azerbaijan's oil pipeline or pipelines will obviously have far-reaching political and economic ramifications. Recognizing this, Turkey, Russia, Iran, and the West are all lobbying for a plan that would best benefit their national agendas. At present, however, Turkey appears to be in the best position given its financial commitment and U.S. backing. In the end, the decision will clearly be political expediency according to Ilham Aliyev, son of Azerbaijan's President and Vice-President of Foreign Economic Relations for SOCAR.
Nasser Sagheb is a management consultant in San Francisco. Masoud Javadi is a business attorney in Washington, D.C.
Amoco Sponsors Lecture Series
Amoco Caspian Sea Petroleum Ltd. has organized a unique series of lectures related to petroleum and environment which for March 1-10 in Baku. Government officials, industry representatives, professionals in the field, faculty and students will attend.
Four professors from Texas A&M University (College Station) will be leading the seminar including Dr. Gilbert Rowe (Oceanography), Dr. Michael Frenkel (Petroleum Engineering), Dr. John Bickham (Wildlife & Fisheries Sciences) and Dr. Ian MacDonald (Geochemical & Environmental Research Group).
The Amoco-sponsored lectures are part of a grant organized in conjunction with the Oceanography Department at Texas A&M which emphasizes four areas: Environment, Oil, Infrastructure and Economics. The first seminar in August 1994 was about Economics. Dr. W. Frank Edwards spoke on "Free Market Economic Principles and the Role of Government", Emaline S. Edwards drew upon her own experience about "Capitalism and the Small Business", and Dr. D. G. Barbee developed the topic of "Human Resources and Energy".
The series gives professors at Texas A&M a chance to meet representatives from Azeri Oil Institute, Baku State University, Azerbaijan Academy of Sciences, the State Committee for Ecology, and SOCAR.
Caspian Geophysical Introduces Seismic Programs
Houston, February 1-SOCAR and Caspian Geophysical hosted representatives of 20 oil and petroleum companies at a special presentation on their new Seismic Program. Caspian Geophysical is the joint venture company between SOCAR (Geophysical Trust) and D.G. Seis Overseas Limited (M.D. Seis and Digicon Geophysical Corporation). They are surveying the 16,300 km of Azerbaijan territorial waters in the Caspian with the re-outfitted seismic vessel, M/V Baki.
A special SOCAR delegation came from Azerbaijan which was led by Dr. Khoshbakht Yusufzade (VP, Geology and Geophysics) included A. Nazarov (Head of the Geophysics), Fuad Bakhshiyev (Chief Engineer of KMNGR-Kaspmorneftegeofizrazviedka), K.M. Kerimov (Head, Administration of Geophysics and Geological Engineering), R. Dadashev (Azerbaijan Cabinet Minister and Chief of Petrochemicals), and Vitaliy Beglyarbekov (Head, Contracts and Joint Prospects).
Major discussion focused on the 1995 "Spec" (speculation) Seismic Program which enables companies to make informed decisions as to which areas are most likely to have oil entrapment and be the most productive.
According to Kindel McNeill, Seis' VP, 15 companies seem to be actively interested in Azerbaijan's offshore developments and another 8-10 are watching closely. To date, six companies have indicated that they will acquire all or part of the program. In the near future Caspian Geophysical will be setting up a Computer and Software Seismic Data Processing Center onshore in Baku.
Exxon Trains Geophysicists
From November 14-25, 1994, Exxon held a two-week course on "Rock Sedimentology" for more than 25 Azerbaijani scientists. The courses were devoted to a new scientific discipline which has been little utilized in Azerbaijan but which has unusually great scientific and practical value for them in being able to predict hydrocarbon potential in the deep water portion of the Caspian.
The classes are part of the "Geologic School" created by the Azerbaijan Association of Petroleum which is an official affiliate of its American counterpart. Attendees included scientists from academic institutes, university professors and industrial geologists and top petroleum specialists from SOCAR.
Exxon's Geologists Rob Hill and Penny Patterson presented sequence stratigraphy techniques which compared geological samples from Europe and the US as it relates to surface and subsurface geology in Azerbaijan. These techniques, developed by Exxon in the 70s and 80s have become widely accepted in the West during the past five years as the technical standard for correlating rocks in outcrops and subsurface areas. They also are pivotal to understanding distributions of reservoir type rock at a given point in geologic time.
Classes at the "Geologic School" are still continuing. Mobil has just completed a course on "Sequence Stratigraphy" instructed by Professor Lindan Rookh. Amoco has plans a course on "Petrophysics", and Unocal will follow with "Geochemistry" in the near future.
According to Dr. Akif Narimanov, Exploration and Development Manager for SOCAR, and President of the Azerbaijan Association of Petroleum Geologists, these classes are enabling Azerbaijan's geologists, geophysicists and geochemists to gain access to the foremost modern scientific research and become integrated into the world scientific community despite earlier scientific isolation during the soviet regime
95 Caspian Oil & Gas Exhibition and Conference
Plans for the 95 International Caspian Oil & Gas Exhibition and Conference which will take place May 23-26 in Baku are well underway. Exhibition organizers, airlines, and hotels should be contacted now to guarantee reservations for Azerbaijan's largest international event of the year.
Now that the "Contract of the Century" has been signed between SOCAR and the Foreign Consortium, and estimated total recoverable oil reserves believed to be 40-60 billion barrels in the Greater Caspian region, there has been a heightened interest in the escalation of activity in the oil and gas industry.
The 1994 Show attracted 170 Exhibitors from 14 countries and 5,500 trade visitors from 27 countries. The organizers, Spearhead Exhibitions and Azerbaijan Chamber of Commerce, are expecting well in excess of 200 companies this year especially as the Exhibition has become a major catalyst for the formation of local partnerships by companies seeking to service the operating needs in the Greater Caspian region. The U.S. Department of Commerce has recently approved the Exhibition under the Department's Trade Fair Certification Program.
Like last year, the Exhibition will officially be opened by Azerbaijan's President, Heydar Aliyev and UK's Minister for Industry and Energy, Department of Trade and Industry, Tim Eggar. Joining them for the first time will be the Norwegian Minister for Industry and Energy, Jens Stoltenberg, and other Energy Ministers from countries surrounding the Caspian area, yet to be confirmed.
This year's conference should be one of the highlights of the event as more papers are being presented by leading industry figures, especially those involved with joint ventures in Azerbaijan.
Each day is devoted to a specific theme: Tuesday (May 23) is "Improvement of Oil and Gas Recovery and Future Prospects (including Geological and Geophysical)". Co-Chairs are Sabir Kuliyev, First Deputy of the President of Azneftmash and F.J. (Sammy) San Miguel, McDermott's VP Marketing CIS.
Wednesday (May 24) focuses on "The Politico-Economics of the Caspian Region: Progress and Impact of Present and Future Developments". Co-chairs are Natiq Aliyev, President of SOCAR, and Tom Hamilton, Pennzoil's President for Exploration and Production.
The theme for Thursday (May 25) is "Enabling Technology, Research and Development including the Environmental Challenge". Co-Chairs are Sabir Kuliyev and Willy Olsen, Statoil's VP for Corporate Planning.
For more details, contact Spearhead Exhibitions Ltd, Ocean House, 50 Kingston Road, New Malden, Surrey KT3 3LZ, UK. Tel: 44-181-949-9222; Fax: 44-181-949-8168 / 8193.
From Azerbaijan International (3.1) Spring 1995.
© Azerbaijan International 1995. All rights reserved.