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Petroleum Review Editorial September 2008
Putin pressure on the pipelines
Devotees of James Bond movies know that the ‘King pipeline’ in The world is not enough is a thinly disguised reference to the Baku-Tbilisi-Ceyhan (BTC) pipeline. Topically, the BBC re-showed the movie this last week (16 August 2008). Now, by reputation, the Russians are James Bond fans – but the twist appears to be that while the lovely but dangerous Electra King, aided by her psychopathic Russian accomplice, was going to gain power and riches by blocking the northern routes for oil out of Central Asia, Russia’s involvement in Georgia can be interpreted as threatening and possibly blocking the southern or non-Russian routes for getting oil and gas out from Central Asia.
Starting with the key facts – the BTC pipeline is 1,100 miles long, of which 155 miles are in Georgia, and currently has a capacity of 1mn b/d. On 11 May 2008 it pumped a record 950,000 b/d and was probably pumping over 800,000 b/d on 5 August when a fire (or explosion?) in the Kurdish dominated part of eastern Turkey closed the line. Other hydrocarbon pipelines transiting Georgia are the oil pipeline to Supsa, Batumi and Poti, with a capacity of 150,000 b/d; the North Caucasus gas line, which links Russia and Armenia via Georgia; and the gas pipeline that runs alongside the BTC line from Azerbaijan via Georgia and into Turkey. The only other pipeline route for oil out of Azerbaijan is via the 100,000 b/d line that goes to the Russian port of Novorossiysk on the Black Sea. Gas could, in theory, be got out of Azerbaijan by reversing the pipeline that used to supply gas from Russia to Georgia, Armenia and Azerbaijan. The other oil egress route, used principally by Socar (the Azerbaijan state oil company), is taking oil in railcars across Georgia to the Black Sea ports of Poti, Supsa, Batumi and Kulevi.
Other possibly relevant facts are that Russian oil production has just recorded its first year-on-year oil production decline since the early 1990s and oil prices have just fallen by over $30/b at some cost to major exporters such as Russia. Abkhazia and South Ossetia have effectively been autonomous regions of Georgia since the civil war in the late 1990s. Ossetia was divided, into North Ossetia inside Russia and South Ossetia within Georgia, by Stalin in the 1930s. Russia likes to regard the Caucasus as its own backyard, acquired at great cost in blood in some of the last Czarist conquests of the 19th century. Russia objects to the expansion of NATO to take in states such as the Ukraine and Georgia, which it regards as being in its own sphere of influence. Russia also dislikes the planned American missile shield being sited in Eastern Europe and the recent agreement by Poland for US missiles to be sited on Polish Territory.
The facts we think we know, but what we are rather less sure of is whether Georgia stepped into a baited trap when it invaded South Ossetia to ‘reintegrate it’ into Georgia. This then led Russian troops to invade Georgia amid stories of Georgians committing atrocities in South Ossetia and ethnically ‘cleansing’ those loyal to Russia.
Since the Russian invasion, there have been stories of Georgians being displaced from South Ossetia and Abkhazia. We have also heard of the Russian military occupation of Gori (where Stalin was born) and of the Black Sea port of Poti, as well as the deliberate sinking of ships in Poti, the blowing up of a key bridge on the railway line across Georgia, of rockets blowing great holes either side of the BTC line and of Georgian military installations and hardware being systematically destroyed.
Despite signing a ‘peace’ treaty, Russia, at the time of writing, had yet to actually take its troops out of Georgia.
It is hard not to conclude that Russia considers the Caucasus a Russian sphere of influence and that it could turn off, block or destroy the oil and gas pipelines anytime it wished.
For the western world, the Georgian war appears to be a disaster. Azerbaijan and Kazakhstan are key suppliers of incremental non-OPEC oil and gas flows. The West was expecting to get over 1.2mn b/d from Azerbaijan and for Kazakh production of over 1.5mn b/d from existing fields, with an additional 1.5mn b/d from the Kashagan field when it is fully developed at the end of the next decade. Realistically, the West cannot drive Russia out or come to the military aid of Georgia. Even putting economic pressure on Russia will be difficult – partly because there is no consensus on how to treat Russia and partly because the West is only just beginning to face the fact that Russia in no longer the weakened and impoverished country it was after the collapse of the USSR.
Today, Russia is the only country that is a major exporter of all three hydrocarbons – oil, gas and coal. But, it is also a major exporter of timber, metals and minerals. As if this was not enough, Russia has no outstanding debt to western banks and, along with Brazil, is the only major country to have significant underutilised farmland to grow the food or biofuels the world needs.
It will take great diplomatic skill and coordinated political will if the West is to now forge a political accommodation with Russia that will allow Caspian and Central Asia oil and gas to flow freely to western markets.
Chris Skrebowski
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
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