Both sides have had successes and failures, and the shadow conflict is not destined to end anytime soon. The case of Azerbaijan epitomizes both the promise and peril of developing Caspian energy.

At issue is the exploitation of a vast reserve of oil and natural gas. In May 2007 the U.S. Energy Information Administration projected that by 2015 Caspian basin energy production could reach 4.3 million barrels per day, concluding that in addition to the region's proven reserves of 17 billion to 49 billion barrels, comparable to Qatar at the lower estimate and Libya on the high end. The region could contain an additional reservoir of hydrocarbons up to 235 billion barrels of oil, roughly equivalent to a quarter of the Middle East's total proven reserves.

Nor is oil the only energy deposit there. The Caspian's potential natural gas reserves are as large as the region's proven gas reserves and could yield another potential 328 trillion cubic feet of gas. In the initial confrontation, the Russian Federation enjoyed the advantage of the Soviet-era Transneft monopoly pipeline network, but the system had two major flaws: a decrepit infrastructure and an orientation toward directing products into the western Soviet Union's production system rather than being geared toward exports.

For Azerbaijan, the first of the post-Soviet potential oil states to seek opportunities to export to lucrative Western markets, these shortcomings substantially reduced Baku's revenue stream.

After the disintegration of the Soviet Union, Azeri President Haidar Aliyev moved swiftly to procure foreign investment, in 1994 signing the Contract of the Century to develop Azerbaijan's offshore Caspian Azeri-Chirag-Guneshli fields. Three years later the 868-mile, 100,000 bpd Baku-Novorossiisk pipeline opened to export Azeri oil from the Black Sea to Western markets. The pipeline almost immediately ran into problems, limiting exports initially to approximately 40,000 bpd; problems included unilateral Transneft transit limitations, disputes over transit fees, as Baku objected to Moscow's $15 per barrel tariff, and the ongoing conflict in Chechnya. A further factor causing unhappiness in Baku was the fact Transneft was incapable of "batch shipping," which meant high-grade Azeri light crude was mixed with lower-grade Russian Urals crude, resulting in a lower per-barrel price. Prior to 1997 Caspian oil exporters had only one major pipeline option, the 210,000 bpd Atyrau-Samara pipeline from Kazakhstan to Russia.

In 1999 the Chechen conflict motivated Russian President Boris Yeltsin to instruct Prime Minister Vladimir Putin to begin construction of a pipeline bypass to skirt the 90 miles of Chechen territory traversed by the Baku-Novorossiisk pipeline; work began Oct. 26. The conflict combined with other issues reduced Azeri exports via Baku-Novorossiisk in early 2000 to an average of only 10,000 bpd. In April 2000 construction finished on the $140 million, 204-mile Baku-Novorossiisk bypass via Dagestan to Tikhoretsk. The bypass had a potential capacity of 120,000 bpd, but by then Baku already had other plans, having worked with neighboring Georgia to develop an alternative pipeline route to the eastern Black Sea coast completely outside of Russian control.

The $600 million, 515-mile Baku-Supsa 100,000 bpd pipeline, essentially a refurbished Soviet-era pipeline, opened in April 1999. In contrast to Transneft's extortionate rates, Georgia only charged Azerbaijan $3 per barrel, in contrast to Russia's $15. Besides the transit revenue, Georgian authorities considered the possibility of building a refinery at Supsa to process the pipeline's crude oil.

The Baku-Supsa pipeline, however, shared a problem with its Novorossiisk counterpart in that its exports were forced to use the Turkish Straits for shipping to global markets, and Ankara was unhappy about the Bosporus and Dardanelles being turned into an energy corridor. Azerbaijan's third and final export project would finally end dependence on Russia and mollify Turkey in the bargain.

The $3.6 billion, 1,092-mile million bpd Baku-Tbilisi-Ceyhan pipeline, which began operations in May 2005, was the final element in Azerbaijan's drive for independence from the Kremlin over its energy exports. A decision to proceed with construction of the BTC was reached at a meeting of the Organization for Security and Cooperation in Europe in Istanbul in November 1999, and construction began three years later.

Unlike Russia's insistence on its Transneft monopoly, Baku showed great flexibility in financing BTC, which is owned by a consortium of energy companies led by BP, with a 30.1 percent stake in the project. Other significant BTC shareholders include the State Oil Co. of Azerbaijan with 25 percent and Chevron with 8.9 percent. BTC benefited all the transit countries, with Georgia estimating BTC would boost its national income by 1.5 percent, while Turkey projected $200 million annually in transit fees even as the pipeline lessened the ecological risks to the Turkish Straits. For Azerbaijan, the fiscal windfall from BTC was projected at as much as $160 billion in revenue over the next 30 years, though given recent record high oil prices, this is undoubtedly a conservative estimate.

The oil revenues generated by BTC in its first year of operation have already had a significant impact on the Azeri economy, whose gross domestic product grew an extraordinary 41.7 percent in the first quarter of 2007. BTC is also having an impact on the United States; in May the EIA reported that since the beginning of the year, the United States imported 2.677 million barrels of oil and oil products from Azerbaijan.

Baku's energy future seems ever brighter, as many additional projects are on the drawing boards, including a proposed 190-mile pipeline to northwest Iran and the proposed 6.74 billion 2,485-mile Nabucco natural gas pipeline project, endorsed on June 26 in Vienna by the energy ministers of Austria, Bulgaria, Hungary, Romania, and Turkey and European Union Energy Commissioner Andris Piebalgs. Another project under consideration is the $3 billion, 1,242-mile Trans-Caspian Pipeline Project to carry annually 16 billion cubic meters of Turkmen and Azeri natural gas to Turkey and 14 billion cubic meters to Europe. Taken collectively, Azerbaijan's energy deals do indeed represent the Contract of the Century.

(e-mail: [email protected])

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