Politics, cost, tariff issues keep pipeline routing volatile

Gas routing falling into place

Marshall DeLuca
International Editor

Pipeline routes across the region [17,744 bytes]
Attempting to follow the progress of any pipeline in the Caspian-Middle East region is virtually impossible. Almost every country with a pipeline proposed within 200 miles of its border wants a stake in the action. Currently, there are more than 10 pipelines in existence or being planned for the region and everyone from Italy to the United States seems to be involved.

Recent estimates state that current pipeline infrastructure is enough to export oil from the South Caspian region until 2003. This fact alone seems to be enough reason for some countries to justify building a pipeline or two from their borders even when the region's reserves are questionable. However, two companies, the 11-member Azerbaijan International Operating Company (AIOC), and the Russian gas, giant Gazprom, remain at the forefront of the action on one existing and three new pipelines of interest.

The AIOC seems to be less than satisfied with the Baku-Novorossiysk pipeline called the northern route. The 11-member international consortium has complained to the Russian company Transneft which controls the transfer of the oil from Azerbaijan to Russia for the frequent and continuing malfunction of the pipeline. Now AIOC is unhappy again and is interested in changing terms on the pipeline.

Oil switching

Amoco, one of the leaders in the consortium, has stated that it pumped about 2 million tons of oil into the line at the Caspian terminal last year. However, when this oil was delivered to Amoco at the Black Sea port of Novorossiysk, it was a different, lower grade, oil than what the company had supplied.

Allegedly, the oil from the Caspian is being traded in Russia in exchange for Siberian oil. The problem is that oil from the Azerbaijan shelf is of a higher grade than that of the Russian oil - a difference that amounts to approximately $1/bbl, thereby setting Amoco up for a loss.

Currently, the agreement between AIOC and Transneft does not account for a difference in qualities of petroleum. Amoco is currently trying to arrange the opening of talks with Transneft over this problem.

The pipeline experienced another problem when it recently shut down due to an explosion where a welded seam was ripped open at an area where it runs across the territory of Chechen. The pipeline was rumored to have been sabotaged by "Gudermes", a group of Chechen militants, which the Chechen government denied. However, a security agent ordered to investigate the accident was recently killed right outside the Chechen Fuel and Energy Ministry.

Turkish option

The final export location of a pipeline from Baku has been the subject of a heated international struggle between Azerbaijan, Georgia, Russia, Iran, Turkey, and the US. The main players in the struggle are the US, Iran, Russia, and Turkey. The US is opting for the route to run from Baku through Georgia to the Turkish Mediterranean Sea port of Ceyhan.

In the meantime, Iran and Russia are each opting for the pipeline to run through their respective borders (which the US opposes for political reasons). A fourth route has also been proposed to run the oil from Baku-Supsa. Turkey opposes this route for environmental and safety reasons. A decision was to be made by the Azerbaijani government in December based on the recommendation of the AIOC, but has been postponed twice.

The US feels strongly that the delays are a good sign that the vote will go in favor of the Turkish route. The government has been openly backing Turkey with a grant of $823,000 to plan its portion of the line and support during talks with Azerbaijan, AIOC, and Georgia.

The delays on the decision are thought to be due to several concerns of the parties involved have on its feasibility. Many are skeptical about the exorbitant cost of the project running through Turkey ($2.3-3.0 billion), while cheaper routes are available, as well as the actual amount of oil the Caspian has to supply a new pipeline (more than 25 dry wells have been drilled in the South Caspian in recent months). This is compounded with increased competition from a newly-functioning AIOC pipeline from Baku to Supsa.

But, the decision keeps edging towards Turkey with news that the government is expected to meet with Azerbaijan, AIOC, and Georgia this quarter to negotiate for the oil transfer tariffs of the pipeline. The Azeris are opting for a price of $3/bbl and a total construction cost of $2.4 billion. Turkey originally established a cost of $4/bbl.

If the vote does go to Turkey, a consortium will be formed for construction of the 1,400-mile project. Membership will be open to any and all interested parties, including AIOC, who is expected to join. A decision is expected by the end of the year.

Gas pipeline

Gazprom of Russia and the state oil and gas company of Italy, ENI, have announced plans to build a gas pipeline that will connect the Russian and Turkish coasts of the Black Sea. The pipeline will be called the "Blue Streak" and run 250 miles across the Black Sea in depths up to 7,000 ft. The line will initially transport 1.3 Bcf to Turkey and will be increased to 6.7 Bcf by 2010. Saipem has been contracted to construct the pipeline at an estimated cost of $2 billion. ENI and Gazprom will each own 50% of the pipeline and 50% of transportation capacity. Blue Streak is expected to be completed by 2000.

In order to get out of a $1.1 billion debt to Russia's Gazprom, the Ukraine has decided to build a new 550-km leg of a gas pipeline that will run between Ananyiv near the Romanian border to Izmail on the Black Sea. The pipeline will be part of a new pipeline from Eastern Europe to Turkey and the Balkans. The cost is estimated at $250 million and completion is set for 2002. The Ukraine will use this pipeline to raise transit fees for Gazprom from $1.09/Mcm to $1.75/Mcm transported over each 100 km, allowing it to offset its debt.