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MOSCOW TRANSFORMS REAL-WORLD GAME OF RISK
Globe and Mail
August 15, 2008 at 10:34 PM EDT
Canada
In early 2002, some 200 U.S. Special Forces soldiers landed in the
former Soviet republic of Georgia to train the Georgian army in
anti-terrorism techniques, including how to protect a planned oil
pipeline from secessionist or anti-Western saboteurs.
With strong encouragement from Washington, Georgia was finalizing
a deal with its neighbours, Azerbaijan and Turkey, and Britain's BP
PLC to build a $3.9-billion (U.S.) pipeline from the oil-rich Caspian
region to the Turkish port of Ceyhan on the Mediterranean Sea.
The 1,768-kilometre, somewhat-circuitous route bypassed major
U.S. rivals in the region, Russia and Iran, as well as Armenia,
the traditional enemy of Turkey and Azerbaijan.
The Baku-Tbilisi-Ceyhan (BTC) project, completed in 2005, entailed
tremendous commercial risk because the three participants were involved
in violent struggles with neighbours or internal separatist groups,
and the pipeline would be vulnerable to sabotage. Under the agreement
with BP, each country was to provide security within its borders and
be responsible for losses should the pipeline be shut down as a result
of political violence.
Enlarge Image Related Articles Recent
News: Georgia can 'forget' regaining provinces News: U.S. demands
that Russia get out Marcus Gee: Don't abandon Georgia to Moscow Rick
Salutin: True lies and foreign wars Globe editorial: Russian hypocrisy
John O'Sullivan: Is Russia morphing into another USSR?
Earlier discussion: John O'Sullivan took your questions Marcus Gee:
Russia no longer content to swallow its bitterness It was part of the
United States' effort to reduce Russia's dominance of the region's
booming oil trade, and by doing so to encourage the development of
independent-minded states on its rival's southern flank.
Now, with its invasion of Georgia, Moscow has dramatically transformed
the real-world game of Risk that is being played out in the region.
For more than a decade, Russia watched while the U.S. and Europe played
the new "great game" of energy geopolitics in its own backyard. It
was 10 years ago this weekend that Russia plunged into financial
crisis by devaluing the ruble and defaulting on its mounting debt.
With the Georgian invasion, the Kremlin has sent notice that it
now controls the Risk board. And that it is willing to use its
armed forces to back up what it regards as its national interest in
neighbouring states.
At stake is control over one of the world's most promising new sources
of crude oil - one that could rival the impact of the North Sea a
generation ago. The U.S., in particular, has worked strenuously to
minimize Russia's influence over this energy development.
"While it is early days to say what the security situation is going
to look like in Georgia longer term, the events of the past few days
deal a blow to the U.S.'s plans to support existing and new oil and
gas routes that bypass Russia," Tanya Costello, Eurasian director
with the political risk consultancy, Eurasia Group, said yesterday.
For BP, the Russian invasion of Georgia could turn into a nightmare
if it forces it to keep closed two oil pipelines that pump more than
a million barrels a day of high-quality oil into world markets. They
represent an overall revenue stream of $100-million (U.S.) a day
among the oil company and its partners.
But then, BP recognized the risks before going into the project
and insured against losses with host governments and export credit
agencies. David Kirsch, an analyst with Washington-based PFC Energy
Group, said multinationals like BP have no choice but to operate in
extremely risky areas. "You go where the oil is," he said.
However, the Russian economy may also pay a price over the conflict,
which further tarnishes its reputation as a safe, reliable economic
partner and has provoked confrontation with the United States.
Ms. Costello said the Georgian war - which was motivated by political
rather than energy concerns - has added to the nervousness of foreign
investors, who dominate the Russian stock market.
In recent months, Russian markets have been rattled by the battle
between BP and its Russian partners, who received government support
for control over joint venture TNK-BP, as well as government threats
to prosecute companies that raise prices too aggressively.
"What happened in Georgia has come on the back of other events in
Russia that have increased market concerns," she said. "Together,
these are increasing the risk perception around the Russian market."
Moscow's aggressiveness and lawlessness has clearly turned off some
Western investors. "Take all the money you want to lose to Russia and
you won't be disappointed," quipped Toronto business leader Seymour
Schulich, who has spent a lifetime in global businesses.
But the country's vast energy and mineral wealth, and its booming
construction and retail sector, amount to a lure that is too enticing
for many to pass up, regardless of the widespread criticism.
Inbound direct investment in Russia totalled $45-billion in 2007,
and is not expected to be dramatically affected by domestic squabbles
or Russia's foreign adventure.
"I don't think direct investors will be so easily deterred and they
will still be seeking opportunities across all different sectors of
the Russian economy, including energy," Ms. Costello said.
Despite setbacks, most of the international oil companies continue to
operate profitably in Russia. BP has made enormous returns from its
TNK-BP partnership, even as its battle with its Russian billionaire
partners heated up and its executives either fled the country or
were expelled for overstaying their visas. Fadel Gheit, an analyst
with Oppenheimer & Co. in New York, said BP has already earned back
its investment in the joint venture, though it may still lose out if
forced to unload its interest in a fire sale.
PUTIN'S HAND
Western governments and producers regard the Caspian-Central Asian
region as they had viewed Russia not so long ago - an important
source of production growth outside the cartel of the Organization of
Petroleum Exporting Countries, and an attractive area for investment
by their multinationals.
But as the West has had to reconsider Russia's role in the global
energy picture over the past five years, it will now have to
recalibrate its assessment of the security of supply from the former
Soviet states.
Moscow's aggressive energy policy in seeking to dominate energy trade
in its "near abroad" - as it calls the former Soviet republics -
is consistent with the approach taken to the oil and gas industry by
former president Vladimir Putin. In bare-knuckle fashion, Mr. Putin
reversed a decade of wide-open capitalism to reassert the dominant role
of the Russian state, heavily dependent on oil and gas for revenue.
Mr. Putin "intended to reorganize the Russian oil and gas industry to
enhance the power of the Russian state," says Martha Brill Olcott,
an expert on Russia with the Carnegie Endowment for International
Peace. "Only then, after the reorganization was complete and the
state's capacity to protect the national interests in this strategic
sector was reaffirmed, would Western firms be invited to participate
in the Russian market."
As rising oil prices strengthened the Kremlin's hand, the former
president, who still wields considerable power as Prime Minister,
acted to correct what he viewed as the unacceptable status quo in
the energy sector.
His government reined in the freewheeling Russian businessmen known
as oligarchs, most famously through the controversial prosecution
of OAO Yukos chief executive officer Mikhail Khodorkovsky. Yukos'
assets were later sold at bargain prices to state-owned companies.
He changed the advantageous terms for Western companies operating
in his country, annulling exploration licences won by Exxon Mobil
Corp. and Chevron Corp. in the Sakhalin offshore, and then forced
Royal Dutch Shell PLC to sell its Sakhalin holdings to state-owned
OAO Gazprom.
He unilaterally raised previously subsidized natural gas prices to
former Soviet republics such as Ukraine and Belarus, raising the threat
of disruptions to gas exports that flow through those states to Europe.
Mr. Putin's assertiveness was fuelled by Russia's growing economic
clout, which resulted from rising oil and gas prices. Russia remains
the world's second-largest producer of oil, at close to 10 million
barrels a day, and the largest producer of natural gas.
When he took power in 1999, crude prices averaged $10 a barrel
and Russia was virtually bankrupt. Since then, Russia has averaged
7-per-cent economic growth a year - 8 per cent in 2007 - and has run a
string of budget surpluses that last year topped 3 per cent of gross
domestic product.
As a result, its foreign reserves grew from $12-billion in 1999 to
$470-billion at the end of last year, a measure of economic strength
equalled only by countries such as China, India and the oil producers
of the Middle East.
The added riches stoked Russia's ambitions to be an energy
superpower. To bolster its presence in energy markets, Moscow not
only boosted the government's role domestically but has also sought
to dominate the export of oil and, especially, natural gas, from its
southern neighbours.
The transportation issue is both economic and political: Russia
reaps huge revenues and more control over export prices by having
its state-owned firms deliver crude and gas from competitors in the
Caucasus and Central Asia. At the same time, control of those exports
gives the Kremlin massive political leverage over Europe.
"Russia knows they are providing huge amounts to natural gas to
Europe - that they have a stranglehold on Europe," said Oppenheimer's
Mr. Gheit. "There is no question in my mind that Russia is going to
play its energy card as much as it can."
Few analysts believe this week's invasion of Georgia was motivated
by Russia's energy ambitions, but it clearly supports the Kremlin's
goal of exercising more clout in the broader region.
As a result of the invasion, Georgia's reputation as a safe alternative
for transporting crude oil and natural gas is threatened, and Central
Asian producers will have to reconsider the risk involved in their
various plans for getting their oil and natural gas to Western markets.
"There are certainly very strong parallels between the development
of Russia's domestic policy and its projection of influence over
the other former Soviet countries," Julian Lee, a senior analyst
with London-based Centre for Global Energy Studies, said in an
interview. "Russia has always felt it would like to exert a high
degree of control over the development of the oil and gas industries
of both Central Asia and the Caucasus, as well as its own."
Stephen Blank, a professor of national security affairs at the
U.S. Army War College in Carlisle, Pa., highlights the American
distrust of Russia's energy policy in the region, though he added
those energy goals were of secondary importance in the current
crisis. "Russia's energy objective is to monopolize all Caspian
energy flows to Europe, so that it can then blackmail Europe and
force political changes to European policy," Prof. Blank said.
It can then play that energy card to block further NATO expansion to
its borders, to prevent criticism of its anti-democratic government,
and to win support for the foreign ambitions of its state-owned
companies, he added.
PIPELINE POLITICS
The United States has long viewed the Georgian energy corridor as
the linchpin of its policy of encouraging independent, pro-Western
states to develop in the former Soviet states in the Caspian and
Central Asian regions.
At a meeting of the Organization for Security and Co-operation in
Europe in Istanbul in 1999, then-U.S. president Bill Clinton lobbied
hard and won agreement from Azerbaijan, Georgia and Turkey to proceed
with the Baku-Tbilisi-Ceyhan (BTC) pipeline project.
The deal represented a major victory for U.S. foreign policy.
The high stakes in the "new pipeline politics" had been clearly spelled
out two years earlier - somewhat undiplomatically - by Sheila Heslin,
who had earlier served on Mr. Clinton's National Security Council as
director of Russian, Ukrainian and Eurasian affairs.
At the time, Western oil firms were making major investments in the
energy-producing states of Azerbaijan, Kazakhstan and Turkmenistan,
but export routes were still under discussion.
Washington's fear was that the former Soviet producers would be
forced to market their oil and gas through Russia and Iran, thereby
conferring both economic and political clout on America's rivals. (Even
then, the U.S. was enforcing sanctions against Iran over its nuclear
program.) In a New York Times opinion piece, Ms. Heslin wrote that
"the consequences would be dire" if Russia and Iran locked up the main
pipeline routes for the Caspian and Central Asian resources.) At the
time, Shell was planning to build a $2.5-billion natural gas pipeline
from Turkmenistan through Iran to Turkey. An oil pipeline was already
under construction that would move crude from Kazakhstan's rich Tengiz
field to Russia's Black Sea port of Novorossiysk.
A second oil pipeline was being considered, and it would be routed
either directly through Iran, or by a more circuitous path through
Georgia. Ms. Heslin said vital American interests required Washington
to ensure the Georgian route won out.
Washington's staunchest ally for the Georgian route - in addition
to Tbilisi itself - was Azerbaijan, which was already sending crude
exports through a Russian-controlled pipeline but wanted to diversify
and did not trust Iran.
When the agreement was struck in 2003, the BTC pipeline had generous
backing from Western governments, including the World Bank's
International Finance Corp., the European Bank for Reconstruction
and Development and seven national export credit agencies.
The BTC pipeline opened in 2005, complementing the smaller Baku-Supsa
line that BP also operates and the Russian line that ends in
Novorossiysk.
This week, BP was forced to shut down the Baku-Supsa line, which
delivers 100,000 barrels a day of oil from Azerbaijan to the Black
Sea port of Supsa. The company said it was planning to reopen the
line as soon as possible.
The larger BTC pipeline had been shut down last week as a result
of apparent sabotage by a Kurdish separatist group. BP is hoping to
reopen the line after Turkish officials complete repairs next week,
assuming the situation in Georgia has stabilized.
Georgian officials - backed up by Western press reports - claimed
Russian bombers had targeted the buried BTC pipeline, but BP said
it saw no evidence to support those allegations. Analysts said they
did not expect Russia to deliberately target the Georgian pipelines,
noting that the Kremlin is eager to bolster its claim that it is a
reliable energy partner.
NO TEARS IN MOSCOW
Fallout from this week's Georgian war may, however, affect future
decisions regarding pipeline routes, and persuade Central Asian
states - which have better relations with Moscow than either Georgia
or Azerbaijan - that the risks of partnering with those U.S.-friendly
states is too great.
Those decisions will not only affect Europe's dependence on Russia for
its gas supplies, but will directly affect the return on investment
of international oil companies that are operating in Azerbaijan,
Kazakhstan and Turkmenistan.
Those states are expected to contribute major growth in non-OPEC
global oil and gas production. Azerbaijan and Kazakhstan are expected
to boost crude production from 11/2 million barrels a day two years
ago to 21/2 million currently, to up to six million barrels a day
within the next 15 years.
"What is really at stake is the unrestricted access of Caspian
oil to world markets," said the Centre for Global Energy Studies'
Mr. Lee. "If, as a byproduct of the conflict in Georgia, people
become more wary in the future of expanding the capacity of the export
corridor through Georgia, then there will be no tears shed in Moscow."
Eurasia Group's Ms. Costello said the key to future projects through
Georgia will be the degree to which the country returns to normal after
the Russia occupation of up to a third of its territory. Serious and
continuing instability in Georgia could force producers like Kazakhstan
and Azerbaijan to rely more heavily on Russian export routes.
Russian President Dmitry Medvedev said Russia's sole motivation for its
incursion was to defend the residents of separatist Georgian enclaves,
South Ossetia and Abkhazia, from Tbilisi's aggression. The Kremlin
has long denied it covets "energy superpower" status or that it uses
energy as a political weapon. It insists it remains a dependable
supplier of energy to world markets.
By yesterday, a de facto ceasefire was in effect, though Russian
troops remained in Georgian territory beyond the disgruntled enclaves
where they had previously maintained a peacekeeping force. With
U.S. Secretary of State Condoleezza Rice at his side, Georgian
President Mikheil Saakashvili signed a ceasefire that would require
Russian forces to withdraw to South Ossetia and Abkhazia, though not
out of the country completely.
Short of a continuing crisis, the regional oil producers are likely
to continue developing non-Russian export routes to reduce their
dependence on their aggressive northern neighbour.
Kazakhstan already exports 60 per cent of its oil through Russian
pipelines, but Moscow is blocking expansion of a line owned by a broad
consortium that delivers Kazakh oil directly to Russian terminals
on the Black Sea. Instead, it would force Kazakhstan to blend its
high-quality crude with lower-grade Russian oil in the line controlled
by state-owned Transneft.
There has been some speculation about building a pipeline across the
Caspian Sea to link Kazakh production with an expanded BTC line,
but both Iran and Russia - which have sea coasts on the Caspian -
would have veto rights over those plans.
Instead, Kazakhstan is likely to ship the oil across the sea by tanker,
and then feed it into pipelines leaving Azerbaijan.
European consumers are also hungrily eyeing Turkmenistan's growing
natural gas production, as a way to reduce reliance of Russian exports,
which account for 25 per cent of European demand and much greater
than that in key markets like Germany.
But natural gas is more difficult than oil to transport because it
cannot be loaded on tankers or rail cars. There are proposals to build
a sub-Caspian pipeline and then ship the gas into central Europe,
a project known as Nabucco.
Analysts say the Nabucco project faces commercial obstacles that are
more problematic than the political resistances of Russia, largely
because Russia and even China would provide greater prices - net
of transportation - on gas sales from Turkmenistan than the Central
Europe market could offer.
So while oil producers may succeed in diversifying their export
routes, natural gas suppliers will remain beholden to Russian and
its monopolist, state-owned Gazprom.
Globe and Mail
August 15, 2008 at 10:34 PM EDT
Canada
In early 2002, some 200 U.S. Special Forces soldiers landed in the
former Soviet republic of Georgia to train the Georgian army in
anti-terrorism techniques, including how to protect a planned oil
pipeline from secessionist or anti-Western saboteurs.
With strong encouragement from Washington, Georgia was finalizing
a deal with its neighbours, Azerbaijan and Turkey, and Britain's BP
PLC to build a $3.9-billion (U.S.) pipeline from the oil-rich Caspian
region to the Turkish port of Ceyhan on the Mediterranean Sea.
The 1,768-kilometre, somewhat-circuitous route bypassed major
U.S. rivals in the region, Russia and Iran, as well as Armenia,
the traditional enemy of Turkey and Azerbaijan.
The Baku-Tbilisi-Ceyhan (BTC) project, completed in 2005, entailed
tremendous commercial risk because the three participants were involved
in violent struggles with neighbours or internal separatist groups,
and the pipeline would be vulnerable to sabotage. Under the agreement
with BP, each country was to provide security within its borders and
be responsible for losses should the pipeline be shut down as a result
of political violence.
Enlarge Image Related Articles Recent
News: Georgia can 'forget' regaining provinces News: U.S. demands
that Russia get out Marcus Gee: Don't abandon Georgia to Moscow Rick
Salutin: True lies and foreign wars Globe editorial: Russian hypocrisy
John O'Sullivan: Is Russia morphing into another USSR?
Earlier discussion: John O'Sullivan took your questions Marcus Gee:
Russia no longer content to swallow its bitterness It was part of the
United States' effort to reduce Russia's dominance of the region's
booming oil trade, and by doing so to encourage the development of
independent-minded states on its rival's southern flank.
Now, with its invasion of Georgia, Moscow has dramatically transformed
the real-world game of Risk that is being played out in the region.
For more than a decade, Russia watched while the U.S. and Europe played
the new "great game" of energy geopolitics in its own backyard. It
was 10 years ago this weekend that Russia plunged into financial
crisis by devaluing the ruble and defaulting on its mounting debt.
With the Georgian invasion, the Kremlin has sent notice that it
now controls the Risk board. And that it is willing to use its
armed forces to back up what it regards as its national interest in
neighbouring states.
At stake is control over one of the world's most promising new sources
of crude oil - one that could rival the impact of the North Sea a
generation ago. The U.S., in particular, has worked strenuously to
minimize Russia's influence over this energy development.
"While it is early days to say what the security situation is going
to look like in Georgia longer term, the events of the past few days
deal a blow to the U.S.'s plans to support existing and new oil and
gas routes that bypass Russia," Tanya Costello, Eurasian director
with the political risk consultancy, Eurasia Group, said yesterday.
For BP, the Russian invasion of Georgia could turn into a nightmare
if it forces it to keep closed two oil pipelines that pump more than
a million barrels a day of high-quality oil into world markets. They
represent an overall revenue stream of $100-million (U.S.) a day
among the oil company and its partners.
But then, BP recognized the risks before going into the project
and insured against losses with host governments and export credit
agencies. David Kirsch, an analyst with Washington-based PFC Energy
Group, said multinationals like BP have no choice but to operate in
extremely risky areas. "You go where the oil is," he said.
However, the Russian economy may also pay a price over the conflict,
which further tarnishes its reputation as a safe, reliable economic
partner and has provoked confrontation with the United States.
Ms. Costello said the Georgian war - which was motivated by political
rather than energy concerns - has added to the nervousness of foreign
investors, who dominate the Russian stock market.
In recent months, Russian markets have been rattled by the battle
between BP and its Russian partners, who received government support
for control over joint venture TNK-BP, as well as government threats
to prosecute companies that raise prices too aggressively.
"What happened in Georgia has come on the back of other events in
Russia that have increased market concerns," she said. "Together,
these are increasing the risk perception around the Russian market."
Moscow's aggressiveness and lawlessness has clearly turned off some
Western investors. "Take all the money you want to lose to Russia and
you won't be disappointed," quipped Toronto business leader Seymour
Schulich, who has spent a lifetime in global businesses.
But the country's vast energy and mineral wealth, and its booming
construction and retail sector, amount to a lure that is too enticing
for many to pass up, regardless of the widespread criticism.
Inbound direct investment in Russia totalled $45-billion in 2007,
and is not expected to be dramatically affected by domestic squabbles
or Russia's foreign adventure.
"I don't think direct investors will be so easily deterred and they
will still be seeking opportunities across all different sectors of
the Russian economy, including energy," Ms. Costello said.
Despite setbacks, most of the international oil companies continue to
operate profitably in Russia. BP has made enormous returns from its
TNK-BP partnership, even as its battle with its Russian billionaire
partners heated up and its executives either fled the country or
were expelled for overstaying their visas. Fadel Gheit, an analyst
with Oppenheimer & Co. in New York, said BP has already earned back
its investment in the joint venture, though it may still lose out if
forced to unload its interest in a fire sale.
PUTIN'S HAND
Western governments and producers regard the Caspian-Central Asian
region as they had viewed Russia not so long ago - an important
source of production growth outside the cartel of the Organization of
Petroleum Exporting Countries, and an attractive area for investment
by their multinationals.
But as the West has had to reconsider Russia's role in the global
energy picture over the past five years, it will now have to
recalibrate its assessment of the security of supply from the former
Soviet states.
Moscow's aggressive energy policy in seeking to dominate energy trade
in its "near abroad" - as it calls the former Soviet republics -
is consistent with the approach taken to the oil and gas industry by
former president Vladimir Putin. In bare-knuckle fashion, Mr. Putin
reversed a decade of wide-open capitalism to reassert the dominant role
of the Russian state, heavily dependent on oil and gas for revenue.
Mr. Putin "intended to reorganize the Russian oil and gas industry to
enhance the power of the Russian state," says Martha Brill Olcott,
an expert on Russia with the Carnegie Endowment for International
Peace. "Only then, after the reorganization was complete and the
state's capacity to protect the national interests in this strategic
sector was reaffirmed, would Western firms be invited to participate
in the Russian market."
As rising oil prices strengthened the Kremlin's hand, the former
president, who still wields considerable power as Prime Minister,
acted to correct what he viewed as the unacceptable status quo in
the energy sector.
His government reined in the freewheeling Russian businessmen known
as oligarchs, most famously through the controversial prosecution
of OAO Yukos chief executive officer Mikhail Khodorkovsky. Yukos'
assets were later sold at bargain prices to state-owned companies.
He changed the advantageous terms for Western companies operating
in his country, annulling exploration licences won by Exxon Mobil
Corp. and Chevron Corp. in the Sakhalin offshore, and then forced
Royal Dutch Shell PLC to sell its Sakhalin holdings to state-owned
OAO Gazprom.
He unilaterally raised previously subsidized natural gas prices to
former Soviet republics such as Ukraine and Belarus, raising the threat
of disruptions to gas exports that flow through those states to Europe.
Mr. Putin's assertiveness was fuelled by Russia's growing economic
clout, which resulted from rising oil and gas prices. Russia remains
the world's second-largest producer of oil, at close to 10 million
barrels a day, and the largest producer of natural gas.
When he took power in 1999, crude prices averaged $10 a barrel
and Russia was virtually bankrupt. Since then, Russia has averaged
7-per-cent economic growth a year - 8 per cent in 2007 - and has run a
string of budget surpluses that last year topped 3 per cent of gross
domestic product.
As a result, its foreign reserves grew from $12-billion in 1999 to
$470-billion at the end of last year, a measure of economic strength
equalled only by countries such as China, India and the oil producers
of the Middle East.
The added riches stoked Russia's ambitions to be an energy
superpower. To bolster its presence in energy markets, Moscow not
only boosted the government's role domestically but has also sought
to dominate the export of oil and, especially, natural gas, from its
southern neighbours.
The transportation issue is both economic and political: Russia
reaps huge revenues and more control over export prices by having
its state-owned firms deliver crude and gas from competitors in the
Caucasus and Central Asia. At the same time, control of those exports
gives the Kremlin massive political leverage over Europe.
"Russia knows they are providing huge amounts to natural gas to
Europe - that they have a stranglehold on Europe," said Oppenheimer's
Mr. Gheit. "There is no question in my mind that Russia is going to
play its energy card as much as it can."
Few analysts believe this week's invasion of Georgia was motivated
by Russia's energy ambitions, but it clearly supports the Kremlin's
goal of exercising more clout in the broader region.
As a result of the invasion, Georgia's reputation as a safe alternative
for transporting crude oil and natural gas is threatened, and Central
Asian producers will have to reconsider the risk involved in their
various plans for getting their oil and natural gas to Western markets.
"There are certainly very strong parallels between the development
of Russia's domestic policy and its projection of influence over
the other former Soviet countries," Julian Lee, a senior analyst
with London-based Centre for Global Energy Studies, said in an
interview. "Russia has always felt it would like to exert a high
degree of control over the development of the oil and gas industries
of both Central Asia and the Caucasus, as well as its own."
Stephen Blank, a professor of national security affairs at the
U.S. Army War College in Carlisle, Pa., highlights the American
distrust of Russia's energy policy in the region, though he added
those energy goals were of secondary importance in the current
crisis. "Russia's energy objective is to monopolize all Caspian
energy flows to Europe, so that it can then blackmail Europe and
force political changes to European policy," Prof. Blank said.
It can then play that energy card to block further NATO expansion to
its borders, to prevent criticism of its anti-democratic government,
and to win support for the foreign ambitions of its state-owned
companies, he added.
PIPELINE POLITICS
The United States has long viewed the Georgian energy corridor as
the linchpin of its policy of encouraging independent, pro-Western
states to develop in the former Soviet states in the Caspian and
Central Asian regions.
At a meeting of the Organization for Security and Co-operation in
Europe in Istanbul in 1999, then-U.S. president Bill Clinton lobbied
hard and won agreement from Azerbaijan, Georgia and Turkey to proceed
with the Baku-Tbilisi-Ceyhan (BTC) pipeline project.
The deal represented a major victory for U.S. foreign policy.
The high stakes in the "new pipeline politics" had been clearly spelled
out two years earlier - somewhat undiplomatically - by Sheila Heslin,
who had earlier served on Mr. Clinton's National Security Council as
director of Russian, Ukrainian and Eurasian affairs.
At the time, Western oil firms were making major investments in the
energy-producing states of Azerbaijan, Kazakhstan and Turkmenistan,
but export routes were still under discussion.
Washington's fear was that the former Soviet producers would be
forced to market their oil and gas through Russia and Iran, thereby
conferring both economic and political clout on America's rivals. (Even
then, the U.S. was enforcing sanctions against Iran over its nuclear
program.) In a New York Times opinion piece, Ms. Heslin wrote that
"the consequences would be dire" if Russia and Iran locked up the main
pipeline routes for the Caspian and Central Asian resources.) At the
time, Shell was planning to build a $2.5-billion natural gas pipeline
from Turkmenistan through Iran to Turkey. An oil pipeline was already
under construction that would move crude from Kazakhstan's rich Tengiz
field to Russia's Black Sea port of Novorossiysk.
A second oil pipeline was being considered, and it would be routed
either directly through Iran, or by a more circuitous path through
Georgia. Ms. Heslin said vital American interests required Washington
to ensure the Georgian route won out.
Washington's staunchest ally for the Georgian route - in addition
to Tbilisi itself - was Azerbaijan, which was already sending crude
exports through a Russian-controlled pipeline but wanted to diversify
and did not trust Iran.
When the agreement was struck in 2003, the BTC pipeline had generous
backing from Western governments, including the World Bank's
International Finance Corp., the European Bank for Reconstruction
and Development and seven national export credit agencies.
The BTC pipeline opened in 2005, complementing the smaller Baku-Supsa
line that BP also operates and the Russian line that ends in
Novorossiysk.
This week, BP was forced to shut down the Baku-Supsa line, which
delivers 100,000 barrels a day of oil from Azerbaijan to the Black
Sea port of Supsa. The company said it was planning to reopen the
line as soon as possible.
The larger BTC pipeline had been shut down last week as a result
of apparent sabotage by a Kurdish separatist group. BP is hoping to
reopen the line after Turkish officials complete repairs next week,
assuming the situation in Georgia has stabilized.
Georgian officials - backed up by Western press reports - claimed
Russian bombers had targeted the buried BTC pipeline, but BP said
it saw no evidence to support those allegations. Analysts said they
did not expect Russia to deliberately target the Georgian pipelines,
noting that the Kremlin is eager to bolster its claim that it is a
reliable energy partner.
NO TEARS IN MOSCOW
Fallout from this week's Georgian war may, however, affect future
decisions regarding pipeline routes, and persuade Central Asian
states - which have better relations with Moscow than either Georgia
or Azerbaijan - that the risks of partnering with those U.S.-friendly
states is too great.
Those decisions will not only affect Europe's dependence on Russia for
its gas supplies, but will directly affect the return on investment
of international oil companies that are operating in Azerbaijan,
Kazakhstan and Turkmenistan.
Those states are expected to contribute major growth in non-OPEC
global oil and gas production. Azerbaijan and Kazakhstan are expected
to boost crude production from 11/2 million barrels a day two years
ago to 21/2 million currently, to up to six million barrels a day
within the next 15 years.
"What is really at stake is the unrestricted access of Caspian
oil to world markets," said the Centre for Global Energy Studies'
Mr. Lee. "If, as a byproduct of the conflict in Georgia, people
become more wary in the future of expanding the capacity of the export
corridor through Georgia, then there will be no tears shed in Moscow."
Eurasia Group's Ms. Costello said the key to future projects through
Georgia will be the degree to which the country returns to normal after
the Russia occupation of up to a third of its territory. Serious and
continuing instability in Georgia could force producers like Kazakhstan
and Azerbaijan to rely more heavily on Russian export routes.
Russian President Dmitry Medvedev said Russia's sole motivation for its
incursion was to defend the residents of separatist Georgian enclaves,
South Ossetia and Abkhazia, from Tbilisi's aggression. The Kremlin
has long denied it covets "energy superpower" status or that it uses
energy as a political weapon. It insists it remains a dependable
supplier of energy to world markets.
By yesterday, a de facto ceasefire was in effect, though Russian
troops remained in Georgian territory beyond the disgruntled enclaves
where they had previously maintained a peacekeeping force. With
U.S. Secretary of State Condoleezza Rice at his side, Georgian
President Mikheil Saakashvili signed a ceasefire that would require
Russian forces to withdraw to South Ossetia and Abkhazia, though not
out of the country completely.
Short of a continuing crisis, the regional oil producers are likely
to continue developing non-Russian export routes to reduce their
dependence on their aggressive northern neighbour.
Kazakhstan already exports 60 per cent of its oil through Russian
pipelines, but Moscow is blocking expansion of a line owned by a broad
consortium that delivers Kazakh oil directly to Russian terminals
on the Black Sea. Instead, it would force Kazakhstan to blend its
high-quality crude with lower-grade Russian oil in the line controlled
by state-owned Transneft.
There has been some speculation about building a pipeline across the
Caspian Sea to link Kazakh production with an expanded BTC line,
but both Iran and Russia - which have sea coasts on the Caspian -
would have veto rights over those plans.
Instead, Kazakhstan is likely to ship the oil across the sea by tanker,
and then feed it into pipelines leaving Azerbaijan.
European consumers are also hungrily eyeing Turkmenistan's growing
natural gas production, as a way to reduce reliance of Russian exports,
which account for 25 per cent of European demand and much greater
than that in key markets like Germany.
But natural gas is more difficult than oil to transport because it
cannot be loaded on tankers or rail cars. There are proposals to build
a sub-Caspian pipeline and then ship the gas into central Europe,
a project known as Nabucco.
Analysts say the Nabucco project faces commercial obstacles that are
more problematic than the political resistances of Russia, largely
because Russia and even China would provide greater prices - net
of transportation - on gas sales from Turkmenistan than the Central
Europe market could offer.
So while oil producers may succeed in diversifying their export
routes, natural gas suppliers will remain beholden to Russian and
its monopolist, state-owned Gazprom.