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Thursday March 8, 2001

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U.S.-backed plan to bring Caspian oil to West appears to be moving forward

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By The Associated Press

BAKU, Azerbaijan - Just outside the Caspian city of Baku, gas hisses from a hillside, sending bright orange flames two feet into the air - evidence of the oil and gas riches that lie beneath the surface.

The United States, Russia and Iran are competing for the right to bring that fuel to the hungry markets of the West, and experts say a U.S.-backed plan to ship the oil via Turkey, bypassing Russia, is slowly gaining the upper hand.

Oil companies could begin drawing up plans for a 1,080-mile pipeline from Azerbaijan's capital of Baku to the Turkish port of Ceyhan as early as June. If it progresses on schedule, construction could begin by summer 2002, and oil could flow before the end of 2004.

"The chances (for the pipeline) are increasing every day," said Sabit Bagirov, an Azeri political analyst who served as president of the state oil company from 1992-93.

But skeptics caution that a resurgent Russia may put up a stronger fight as the pipeline moves forward and that even after paying $120 million for the engineering plan, oil companies could back out of the $2.7 billion project.

And they add that although the Clinton administration strongly backed the project, the new U.S. administration has yet to put its weight behind the plan.

The oil pipeline has been a key part of a U.S. policy to lure the newly independent states of the Caucasus and Central Asia out of Russia's orbit and toward the West.

The pipeline would bring one million barrels of oil a day to southern Turkey. That is about two-thirds as much oil as the Alaska pipeline and would help the West reduce its dependence on Gulf exporters and could lead to lower gas prices.

It also would mean that Caspian Sea oil producers such as Azerbaijan, Kazakstan and Turkmenistan would not depend on Russian pipelines for shipping their oil. The area is believed to have proven oil reserves of up to 40 billion barrels and experts say far more could lie undiscovered. Kuwait has proven reserves of 96 billion barrels.

Oil from Azerbaijan is now shipped through Russian and Georgian lines. The new pipeline would be used for newly discovered oil.

Higher oil prices and new oil finds in the Caspian have made the U.S.-backed plan, the most expensive option, more economically viable.

And oil company officials, many of whom have backed an Iranian plan - the cheapest option - have begun to realize that Azerbaijan will not budge on its insistence that its oil - and its economic future - be tied to the West and not Russia or Iran.

"The more chances Baku-Ceyhan has, the more independent Azerbaijan ... becomes," Bagirov said.

But Russia is hardly bowing out of the competition.

Russian President Vladimir Putin visited Azerbaijan in January. At about the same time the Russian navy held exercises in the Caspian, a move many Azeris saw as a pointed reminder of Russia's power.

Russia insists the oil should run to its port of Novorossiisk on the Black Sea. That option could cost as little as half the $3 per barrel that Baku-Ceyhan is expected to cost.

"Russia is doing whatever it can to block the project," said Rasim Musabeyov, a political analyst and chairman of Azerbaijan's Musavat opposition party.

Moscow also exerts enormous influence on Georgia and the pipeline must pass through Georgia to reach Turkey.

"The Azeris can scream until they are blue in the face ... but if Georgia is finding it more and more difficult to confront Russian pressure, Baku-Ceyhan will not be viable," said Bulent Aliriza, an analyst at the Washington-based Center for Strategic and International Studies.

Azerbaijan's southern neighbor, Iran, has proposed the oil be sent by barges across the Caspian to northern Iran, where there have been oil shortages. An equal amount of oil would then be shipped to the West from Iranian oil fields, some 400 miles to the south.

That option is by far the cheapest, but Azeri and so far, U.S. officials, will not even consider it.

"Azeris don't want it to happen," said Mike Bilbo, head of external affairs for Turkey and the Caspian at BP, which heads the consortium that would build the pipeline.

Azerbaijan, like Iran, is overwhelmingly Shiite Muslim, but it is a strongly secular state and regards Iran with deep suspicion.

Iran has asked to join the Baku-Ceyhan consortium, but Washington has apparently blocked the move. Russia's Lukoil has a 10 percent share.

There are also concerns there is not enough oil to fill the pipeline. Companies that back the pipeline are expected to produce in 2004 only about half the 1 million barrels a day the pipeline needs to be profitable. They say new companies are expected to join the group and there is drilling in at least a dozen new fields.

But the pipeline could be delayed until that new oil is found.

"A pipeline is not built for political reasons, but for economic reasons," Aliriza warned.

The fight for Baku's oil is hardly new.

During World War II, some of the most brutal battles were fought north of Azerbaijan, where Hitler's tanks tried to take the Caspian oil fields, which supplied much of the fuel for the Red Army.

Today, the city's old glory is evident in the miles of rusting oil derricks dotting the shores and countryside outside Baku.

Much of the infrastructure is old and dilapidated. Oil leaks leave parts of the city smelling like a gas station.

Most of the new oil fields are miles offshore.

Just outside the city is Yanar Dag or Burning Hill, where flames leap from an area 20 feet long and three feet wide - a fire that has burned for about a hundred years, residents say.



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