Startup of the Baku-Tbilisi-Ceyhan Pipeline: Turkey's Energy Role
By Soner Cagaptay and Nazli Gencsoy

Washington Institute for Near East Policy
May 27, 2005

On May 25, the presidents of Azerbaijan, Kazakhstan, Georgia, and Turkey
inaugurated the Baku-Tbilisi-Ceyhan pipeline (BTC), a major artery linking
oil fields in the Caspian Sea region to the Mediterranean Sea and Western
markets beyond. It will take several months for oil pumped from Baku,
Azerbaijan, to pass through Tbilisi, Georgia, and reach the Turkish coast at
Ceyhan. Eventually, BTC will carry up to 1 million barrels per day (bbl/d)
of crude oil to the Mediterranean. With growing concern over Western
dependence on Middle Eastern oil and rising global oil prices, Turkey is
emerging as a key country in providing Caspian oil to the Western world.

Background: A Pipeline Born of U.S.-Turkish Cooperation

According to British Petroleum's Statistical Review of World Energy, proven
oil reserves in the Caspian Basin total 16.5 billion barrels, comparable to
the reserves of Canada, Mexico, or the OPEC member state Qatar.

President Bill Clinton and Turkish President Suleyman Demirel settled heated
debate in the mid-1990s over how best to bring Caspian oil to world markets
by throwing their weight behind the BTC. Washington and Ankara saw the BTC
as a key east-west corridor that would ensure the independence and economic
viability of the newly independent states in the Caspian Basin. The BTC also
made strategic sense to the United States and Turkey because it would bypass
politically unstable places like Iran, the northern Caucasus (including
Chechnya), and Armenian-occupied parts of Azerbaijan.

Further, the BTC was seen as useful to easing the burdens on the Turkish
Straits of the Bosporus and the Dardanelles. Today, more than 5,000 tankers
cross the Turkish Straits each year, carrying Caspian oil from the Black Sea
to the Mediterranean. The sea traffic through the narrow, zigzagging straits
carries grave risks, especially since any accident could cause an
environmental catastrophe in downtown Istanbul, which sits along the
Bosporus.

When others questioned the project's feasibility, Clinton appointed a
special envoy for Caspian energy affairs and Demirel visited Georgia and
Azerbaijan to push for the project. The unprecedented level of U.S.-Turkish
cooperation, as well as successful coordination by both countries'
diplomats, made the seemingly impossible pipeline possible.

Building the BTC

In 1997, Western oil companies started to explore the commercial viability
of the BTC project. An international consortium of eleven partners --
Britain's BP; Azerbaijan's SOCAR; Norway's Statoil; U.S. based Unocal,
Amerada Hess, and ConocoPhillips; Turkey's TPAO; Italy's Eni; Japan's INPEX
and Itochu; and France's TotalFinaElf -- began construction of the pipeline
in May 2003. With a 30 percent share in the project, BP is the largest
stakeholder, and served as acting leader for the project's design and
construction phases.

The BTC, which cost an estimated $3.7 billion for construction, financing,
and line-fill, has received limited public funding. The European Bank of
Reconstruction and Development and the International Finance Corporation,
the World Bank's private-sector arm, pledged $250 million in loans. Although
a small amount compared to the project's total funding, World Bank
participation acted as a catalyst to bring foreign direct investors to the
project.

Because it traverses 176 widely varied and sensitive terrains while crossing
the politically unstable Caucasus region, the BTC was bedeviled by worries
about its security and environmental risks. Accordingly, the U.S. military's
Special Forces trained 1,500-2,000 Georgian soldiers in anti-terrorism
techniques under a $64 million program aimed at protecting the pipeline
against saboteurs. In addition, a BP-led consortium granted an additional
$25 million to local non-governmental organizations to manage environmental
programs.

The entire length of the 1,094-mile BTC, the longest oil-export pipeline in
the world, is buried. Once the pipeline becomes fully operational,
Azerbaijan will be the main beneficiary of the sale of its oil in
international markets, collecting (at current prices) about $29 billion per
year in oil revenues, while Georgia and Turkey will respectively collect
transit fees of $600 million and $1.5 billion per year.

Ceyhan Becomes a Nexus of Global Energy Lines

With BTC, Ceyhan will emerge as a major energy supplier to the world.

Ceyhan's port, Yumurtalik, is already the terminus of Kirkuk-Ceyhan
pipeline, which has the capacity to bring about 1.5 million bbl/d oil to the
Mediterranean from northern Iraq (though it is presently closed due to
continuing attacks by Iraqi insurgents). Another pipeline is now under
consideration to bring Caspian gas from Baku, via Tbilisi, to Erzurum in
eastern Turkey from where it would be transported to Ceyhan. There are other
new projects designed to make Ceyhan into an even bigger hub of energy
supply: Samsun-Ceyhan gas/ oil lines and terminal. Turkey intends to enlarge its
natural-gas transmission by extending the Blue Stream pipeline, which
connects Russia with Ankara through the Black Sea, through an
Ankara-to-Ceyhan extension. After a liquid-natural-gas export terminal is
built in Ceyhan, this plan would enable Turkey to re-export Russian gas.

Turkey also wants to build a cross-Anatolian oil line, from Samsun on the
Black Sea to Ceyhan on the Mediterranean, to further decrease traffic
through the Turkish Straits.

Kazakhstan Extension. In March 2005, Kazakhstan and Azerbaijan agreed to
build the Aktau-Baku pipeline, connecting the Kashagan offshore oil fields
near Aktau in Kazakhstan to the BTC in Baku via a sub-Caspian in 2008. The
Kashagan field is expected to produce 1.2 million bbl/d by 2016, when
600,000 bbl/d of its production is to be shipped across the Caspian Sea to
be fed into the BTC line.

Ceyhan-Haifa Pipeline. This project, first discussed during Turkish Prime
Minister Recep Tayyip Erdogan's May 2005 visit to Israel, aims to bring BTC
oil to Israel via a sub-Mediterranean pipeline through Cyprus. There are
also plans for parallel pipelines to carry water, gas, and electricity, and
perhaps fiber-optic lines, to Israel, as well as to Northern Cyprus, Jordan,
and the Palestinian territories, bringing the latter closer to Turkey and
Israel economically and politically.

Implications of Turkey's Emergence as an Energy Entrepot

Turkey's new position as a way-station for energy distribution could be a
useful asset in its relations with both the European Union and the United
States. Turkish membership would give the EU a direct route to Caspian
energy resources that does not cross Russia; as a major energy producer;
Russia has not been very helpful getting Caspian energy to outside markets.

In the post-Iraq War period, the energy issue should also strengthen
U.S.-Turkish relations. Turkey's strategic value sometimes comes under
doubt. But Turkey is an important route for the export of oil from northern
Iraq. By binding the Caucasus region with the West through the BTC, Turkey
is now a key country in accessing the energy sources of the landlocked
Caspian Basin. And the BTC has significantly limited the share of Caspian
oil that must be transported through Iran. Tehran currently transports a
mere 35,000 bbl/d Caspian oil, which it buys from Turkmenistan and
Kazakhstan through a swapping agreement. The BTC and other projects
involving Turkey should remind Americans and Turks alike that as members of
the Western world, they have shared interests that can be promoted through
cooperation.

Soner Cagaptay is a senior fellow and director of the Turkish Research
Program at The Washington Institute. Nazli Gencsoy, a Dr. Marcia
Robbins-Wilf young scholar, is a research assistant at the Institute.