Analysis: Azerbaijan diversifies oil export routes

By JOHN C.K. DALY, UPI International Correspondent  |  Oct. 3, 2008 at 4:13 PM
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WASHINGTON, Oct. 3 (UPI) -- The August military confrontation between Georgia and Russia had a crippling collateral effect on Azerbaijan. In the wake of the conflict, which effectively shut in the majority of Azeri oil exports, Baku has broadened its export strategy to include renewing ties with Russia and, in an event certain to irk Washington, expanding oil swaps with Iran.

The truth is, however, the Russian-Georgian clash demonstrated the risk of Azerbaijan transporting all its oil exports via Georgia, and it also showed that Washington's "happiness is multiple pipelines" strategy -- so long as they avoided Russia and Iran -- is effectively dead. For all of the posturing inside the Beltway over Georgia, the reality is that the vulnerability of Washington's aforementioned strategy has been glaringly exposed to all but the coldest of warriors, and Azerbaijan is discreetly developing a post-conflict policy to ensure that its oil exports do not again get bottled up, a policy which includes improving relations with Moscow and Tehran.

Baku was already suffering from the loss of its key export route, the 1,092-mile, $3.6 billion, 1 million barrel per day Baku-Tbilisi-Ceyhan pipeline, which suffered a devastating explosion around 11 p.m. on Aug. 5 in Turkey at Yurtbasi village at the BTC's Valve 30, causing flames to shoot hundreds of feet into the nighttime sky. After initially assessing the damage, officials in Ankara closed BTC valves No. 29 and 31 and waited for the four miles of oil in the No. 30 terminal to burn itself out. BTC operator BP declared force majeure on existing contracts until repairs could be affected. The Georgian-Russian military clash broke out two days later.

BTC is the crown jewel of Western investment in constructing a Caspian "energy corridor" dominated by Western companies. Russia, Iran and Armenia opposed the pipeline, portraying the BTC corridor as risky and unstable. BTC, which opened in May 2006, took a year to fill before beginning operations, and represented Western energy interests' trump card in wresting Caspian production from Russian control.

For Baku, the explosion was a disaster, as BTC had been pumping 850,000 to 900,000 bpd before the conflagration. Baku moved swiftly to divert its exports, eventually diverting 200,000 bpd to alternative pipelines, reviving the dormant Baku-Supsa pipeline through Georgia and sending oil northward to Russia through the Baku-Novorossiisk pipeline, which BTC had been built to circumvent. The 550-mile Baku-Supsa line, opened in 1999, provided Azerbaijan with its first export pipeline not under Russian control, and was transporting 90,000 bpd of Azeri capital oil to the Georgian Black Sea coast before the Georgian conflict. Baku-Suspa was shut down by pipeline operator BP on Aug. 11 as a precaution, since it skirted the conflict zone.

Azerbaijan then turned to utilizing railway shipments to Georgia's Batumi (200,000 bpd) and Poti (100,000 bpd) Black Sea ports, but Poti was closed following Russian air strikes reported on Aug. 8. Adding to the grim picture, the fighting also closed in exports from Kulevi, Georgia's third Black Sea oil terminus, opened last year and capable of shipping 200,000 bpd.

Faced with the closures in August, Azerbaijan delivered its first oil cargo of 100,000 tons to the National Iranian Oil Terminals Co. Caspian Neka port facilities for an oil swap.

When BP reopened BTC on Aug. 25, approximately 17 million barrels of crude had been locked in in Azerbaijan; according to the U.S. Department of Energy, Azerbaijan's final cost for the lost shipments was more than $1 billion, while repairs, the burned oil and firefighting costs added another $20 million to Baku's tab.

Of all Azerbaijan's responses to the crisis, it is its interest in oil swaps with Iran that will perturb Washington the most, but for Baku, it is merely a pragmatic business arrangement devoid of the ideological content that the United States injects into every energy issue involving Iran. Lest Beltway insiders doubt Azerbaijan's perceptions of the changed Caspian geopolitical landscape in the aftermath of Georgia's ill-advised military misadventure, State Oil Co. of the Azerbaijani Republic Vice President Elhar Nasirov put it as diplomatically as possible, telling a Financial Times correspondent that Azerbaijan would continue its post-BTC explosion policy of exporting oil to Iran and Russia even though shipments through Georgia had resumed, because of the increased risks in the Caucasus, commenting, "We don't want to insult anyone, but it's not good to have all your eggs in one basket, especially when the basket is very fragile." Azeri Foreign Minister Elmar Mammadyarov added, "We are trying to be friends with everybody and at the same time acting in accordance with our national interests."

Iran is actively courting Caspian business. In May, National Iranian Oil Refining and Distribution Co. Oil Refining Department Director Aminollah Eskandari told reporters, "Countries in the region should not ignore Iran as an attractive option for access to international markets and as a reliable partner," remarking that Iran is planning not only to increase Neka's handling capabilities but also to build a trans-Iranian pipeline linking Neka to Iran's Arabian Sea port at Jask. It looks like Eskandari's optimism was justified, as on Sept. 10 SOCAR's Nasirov said that by the end of September, Azeri oil swaps would total 300,000 tons.

Not that Baku is relying completely on diplomacy to safeguard its interest; according to a recent report in Azeri newspaper Baki Xabar, Azerbaijan is to purchase several million dollars of Israeli armaments, as Azerbaijan's defense spending is slated to increase by 30 percent in 2009.

For Washington, which has threatened regional producers seeking to increase business with punitive sanctions under the 1996 Iran-Libya Sanctions Act, Azerbaijan's actions are but one more reminder that in its eagerness to confront the Russian bear through its Georgian surrogate it has provided the Iranian government with its best opportunity yet to break out of the ILSA straitjacket. Given that Kazakh exports were similarly inconvenienced by the closure of Georgian ports, it seems likely that the West's two Caspian shining hopes will deepen their transport arrangements with charter "axis of evil" member Iran. Summing up the new world order as yet unrecognized by Washington, Azerbaijan's and Kazakhstan's Caspian neighbor Russian President Dmitry Medvedev said, "The time of domination by one economy and one currency has been consigned to the past for once and for all." Baku, closer to Moscow, had paid heed.

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