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ICE Case Number 187

Azerbaijan Oil Pipeline Route, Michael Goulet

I. Case Background
II. Environment Aspect
III. Conflict Aspect
IV. Env. - Conflict Overlap
V. Related Information


1. Abstract

On 20 November 1994 a consortium of oil companies signed a contract with the nation of Azerbaijan. The consortium, led by British Petroleum, is to invest $8 billion for oil production over a period of 30 years. The consortium is made up of the American companies Amoco Corp., Exxon Corp., McDermott International Inc., Pennzoil Co., and Unocal Corp.; British Companies, British Petroleum PLC and Ramco; Norway's Statoil; Turkish Petroleum; Saudi Arabia's DNKL Oil; Lukoil, the State oil firm of Russia; and the State Oil Company of Azerbaijan. The consortium believes it can extract up to 4 billion barrels of oil from three wells in the Caspian Sea. However, a problem has developed dealing with the route the oil will take to the world market. At the moment there are three alternatives to choose from; One which would transport oil north from the Azerbaijani port of Baku through Russia; second, which would transport the oil through Georgia; and finally, a southern route through Armenia and Turkey.(Pope 1994, 1) There are many environmental aspects to the issue. They all basically deal with the possibility of damage or destruction of the pipelines. This is due to the fact that this is a politically volatile region of the world.

2. Description

In 1990 the government of Azerbaijan began negotiating a possible oil deal with the British oil giant British Petroleum. Both sides saw that there was chance to earn large profit from the deal. Azerbaijan needed desperately to redevelop its obsolete oil drilling and refinery equipment (production had fallen to 1900 levels and was declining at a rate of 6 percent per year.) As for British Petroleum, this was a chance to enter into a vastly underdeveloped market. In addition, Azerbaijan no doubt recognized the political benefits to come from an agreement, namely independence and hard currency, which mattered greatly in the early post-Cold War. Finally, after three years of negotiation a deal was struck.(Pope 1994, 3)

A consortium of oil companies led by British Petroleum, known as the Azerbaijan International Operating Company, signed a $8 billion 30 year contract with the nation of Azerbaijan.(Pope, 1994, 2.) The consortium was between what grew to be twelve companies from England, Norway, Turkey, Saudi Arabia and the United States, as well as the state oil companies of both Armenia and Russia. The agreement calls for the development of three Azerbaijani oil fields in the Caspian Sea. Oil production will be phased in in increasing increments starting in 1996. By the end of 1997, it is hoped that the peak sustained output of 700,000 barrels per day will have been reached.(Pope 1994, 4) In all, there is believed to be a reserve of 4 billion barrels of oil. These fields are thought to hold enough oil to be "a bonanza that rivals Kuwait."(Southerland 1995, A11)

While the consortium finally have the agreement signed, there was a problem that required immediate attention. Their plan is to sell the oil on the world market. As such, the oil must be transported from Baku, the Azerbaijani port of origin to potential world clients by way of the Turkish port of Ceyhan. There were 3 possible routes to be taken. The first involves constructing a pipe line from Baku to the west in neighboring Georgia. From there it would be shipped to Ceyhan. A second would involve constructing a pipeline that would travel south through Armenia into Turkey to Ceyhan. Finally, an existing pipeline could be used by sending the oil north to the Russian port of Novorossiysk, from there it would be shipped to Ceyhan.(Daniloff 1995, C2)

All the nations involved stand to earn a great deal from the agreement, particularly Russia. For one thing, Russia wants to retain a 'special' (influential) relationship with those states that were former members of the Soviet Union. It would lose this opportunity, it feels, if a distribution route that bypasses Russia is chosen. In addition, there is a great deal of money to be made from this agreement through sales, profits and tariffs from oil crossing the Russian border. . . hard currency that the nation is in dire need of. Lastly, and perhaps most importantly, there is the issue of Russian security. Russia is fearful that it will be in a negative position if it did not have a hand in oil distribution because the deal is between a former member of the Union and current members of NATO. In addition, if the Azerbaijani consortium turns out to be successful, there is another former republic, Kazakhstan, that is in a position to be as successful as, if not more so than Azerbaijan. This is due to the large reserves of oil it holds in the Caspian Sea.

For Azerbaijan, the issue also relates to security. Azerbaijan will gain both physical and financial stability. The chances of increasing its per capita income are much greater due to its contract with the consortium. This increased financial stability will allow it to have greater control over its dometic and international affairs. In addition, it will be provided with perhaps true and final independence from its former overlord, Russia. The West also can gain security from the consortium. It would be a chance to reduce its reliance on the Persian Gulf as a source of oil.

The choices to be made are thus influenced by a myriad of details. However, there is one rather important issue which has not been discussed, the environment. The environment serves to be severely damaged if any number of very likely events occur. Firstly, the threat of terrorism on every possible pipeline route is very high. The first route is through Georgia, which has not yet rid itself of the horrors of civil war. Thus there is the possibility of the pipeline being targeted by the combatants. The second route, through Armenia, is the sight of an almost 7 year clash with Azerbaijan over the disputed Ngorno-Karabakh region. The final route through Russia directly traverses the Chechen war zone. In addition, the Russian oil pipelines are in a horrendous state of upkeep, with over 700 spills per year.(BBC Monitoring Service 1995, 2) There is also the likely possibility that the Caspian Sea itself will be polluted by any number of possible mishaps. Finally, if one of the first two oil routes were chosen, oil would have to be shipped to Turkey through the already overcrowded Bosporus Sea channel. Thus animal or fish life, the very ecosystem itself, could be adversely affected by pipeline or shipping spills. For other relevant TED Cases, see Ecuador Case, Norwoil Case, and Shetland Case.

The decision on which route to use faced a lengthy debate. Finally, on October 9 1995, in a show of compromise, the twelve member consortium agreed to have 2 pipelines. The first will be the Russian route. The 1400 kilometer route will traverse Chechnya and end at the Black Sea port of Novorossisk. The construction of 27 km of new pipeline is required. The second route will be through Georgia to its Black Sea port of Batumi. This 920 km pipeline requires the construction of 140 km of new pipeline. This decision reflects, in part, geo-political influences. In one sense, the consortium was influenced by the Western governments to accept a Russian route, this was done so Russia would not feel alienated. Secondly, selecting 2 routes disallows Russia from having a strangle-hold over oil distribution.(Clark and Levine 1995, 1) Though a decision has been finally reached, it leaves much to be desired environmentally.

3. Duration


4. Location

Continent: Europe
Region: Eastern Europe
Country: Azerbaijan

5. Actors

Azerbaijan, Turkey, and Russia

II. Environment Aspects

6. Type of Environmental Problem


7. Type of Habitat


8. Act and Harm Sites:

Russia and Azerbaijan

III. Conflict Aspects

9. Type of Conflict


10. Level of Conflict


11. Fatality Level of Dispute (military and civilian fatalities)


IV. Environment and Conflict Overlap

12. Environment-Conflict Link and Dynamics:

13. Level of Strategic Interest

14. Outcome of Dispute:

V. Related Information and Sources

15. Related ICE Cases

16. Relevant Websites and Literature

Associated Press. "Caspian Pipeline Decision Favors Oil Route in Russia." The Washington Post, 8 October 1995.

BBC Monitoring Service, CIS. "Azerbaijani President's News Conference on Caspian Oil Deal." BBC Monitoring Service, 23 September 1994.

BBC Monitoring Service, CIS. "Russian Environment Minister Criticizes Plans to Develop Caspian Oilfields." BBC Monitoring Service, 21 October 1994.

BBC Monitoring Service, CIS. "Oil Pipelines Spill 3M tonnes a Year." BBC Monitoring Service, 10 February 1995.

Clark, Bruce and Steve LeVine. "Compromise Deal Today Over Caspian Oil Route." The Financial Times, 9 October 1995.

Daniloff, Ruth. "Oil and Blood in the Caucasus." The Washington Post, 1 October 1995.

The Economist Reporting Service, Europe. "Caspian Oil, Of Pipedreams and Hubble-bubbles," The Economist, 25 March 1995.

The Economist Reporting Service, Business. "Moscow Rules," The Economist, 24 September 1994.

Mekhtiyev, Aidyn. "U.S. Fully Supports 'Contract of the Century.'" The Current Digest of the Post Soviet Press, 2 November 1994.

Mekhtiyev, Aidyn. "British Petroleum Will Develop Caspian Oil." The Current Digest of the Post Soviet Press, 30 March 1994.

Pope, Hugh. "Britain is Set to Cash in on the Oil Rush in Azerbaijan." Independent, 27 September 1994.

Southerland, Daniel and Thomas W. Lippman. "Caspian Basin's Shaky

Oil-Shipping Formula." The Washington Post, 25 September 1995.