The New Great Game Opportunities for Trans-Atlantic Cooperation in the Caspian Region

Natural resources in the Caspian region are vital to the European Union's future energy policy. Though the United States has been focusing on the region since the 1990s, European decision-makers have largely neglected its strategic importance.

By Richard Morningstar


The Baku-Tbilisi-Ceyhan (BTC) pipeline at the Ceyhan crude oil terminal near Turkey's southern coastal city of Adana.
AFP

The Baku-Tbilisi-Ceyhan (BTC) pipeline at the Ceyhan crude oil terminal near Turkey's southern coastal city of Adana.

In July 2006, the Baku-Tbilisi-Ceyhan (BTC) Pipeline, which runs from the Caspian port of Baku, through Azerbaijan and Georgia to the Mediterranean port of Ceyhan on the Turkish Coast, became operational. The successful completion of this oil pipeline and the opening in coming months of a gas pipeline mirroring the BTC route, to ship Azerbaijani gas to Turkey, and perhaps ultimately to Europe, make clear the critical importance of the Caspian region to the United States and Europe. Since the nineties, successive American Administrations have focused attention on this region. Policymakers understood the link between geopolitics, the development of energy resources and commercial interests.

The European Union and member states have taken a less focused view and have generally taken the position that decisions relating to energy are commercial in nature, and governments should not interfere with those decisions. The successful completion of BTC and Europe’s over-dependence on Russian natural resources – which has made the supply of natural gas to Europe an issue of public concern for the first time since the Cold War – demonstrate that this position is ill-advised, that European Governments should take a high profile in promoting the development of Caspian natural resources and that Europe and the United States should work together in achieving this goal.

Transatlantic Thinkers


The transatlantic relationship is not over, as has sometimes been suggested in recent years -- but it has changed. There is still consensus in Europe and the US that the urgent global challenges confronting us today can only be met in a joint effort. The goal is to identify specific fields for strategic cooperation and formulate effective and coherent policy options toward them. Germany's Bertelsmann Stiftung aims to help in this process. The new series "Transatlantic Thinkers" provides a fresh perspective on these opportunities, touching upon topics such as energy security, climate change, civil liberties in an age of terror, trade and many others. The series is planned as part of the run-up to the annual "Brussels Forum" in April.
Whereas U.S. Caspian policy is intended to increase the world-wide supply of natural resources, not to direct specific Caspian resources to the United States, Caspian resources, particularly natural gas, should be even more important to Europe than to the United States. The huge natural gas resources that can be found in Kazakhstan, Uzbekistan, Turkmenistan and the Western Caspian are critical, because they can ultimately lessen Europe’s over-dependence on Russian gas. As EU Energy Commissioner Andris Piebalgs recently pointed out in a Wall Street Journal interview, Kazakhstan by 2015 could be producing 20% more gas in a year than consumed by all of Germany. Also, the region is the only one apart from the Persian Gulf where oil production is likely to increase over the next decades.

The U.S. Role in the Caspian

The opening of the BTC pipeline was the successful culmination of a consistent, bipartisan United States policy relating to Caspian Basin energy resources that has spanned both the Clinton and Bush Administrations.

The objectives that served as the framework for U.S. policy during the Clinton Administration remain equally valid today in this critical post 9/11 world. It is worth exploring how this policy developed and the implications to be drawn from this experience for future European activity and transatlantic cooperation in the region.

One need only look at a map of the greater Caspian region, which stretches from Turkey to Kazakhstan, to realize its huge geopolitical and economic importance. The United States’ strong interest in the Caspian dates to the break-up of the Soviet Union. Virtually overnight eight new independent states came into existence in an area rich with natural resources: Georgia, Armenia, Azerbaijan, Kazakhstan, Uzbekistan, Kyrgyzstan, Turkmenistan and Tajikistan. The principal component of U.S. policy was to help these new states develop as stable independent countries that would ultimately become market democracies in an uncertain part of the World. Now, several years later, democratization in most of these countries has been slow, but these countries to date have maintained their independence, which many predicted would be impossible.

In addition, the United States believed and still believes that the development of natural resources in the region should provide an alternative source of oil and gas at a time when South Asia and the Middle East are becoming increasingly unstable and demand is soaring from India and China. The U.S. has wanted to make sure that these resources be available for development by American companies as well as business interests from friendly countries; that Turkey, because of its own historical roots, become more involved in the region to help insure the independence of these new countries; and that multiple routes of access be developed for resources to be exported from the region. The U.S. position was and still is that Russia should not have a monopoly on pipelines transporting Caspian resources, and that no pipelines should go through Iran thereby subjecting these new resources to the whims of a dangerous government.

Before discussing the implementation of U.S. policy regarding pipelines since the mid- Nineties, we should look at what the existing and proposed pipelines in the region were following the break-up of the Soviet Union. In the Western Caspian, apart from the proposed BTC pipeline, there was already in existence a small and decrepit pipeline from Baku to Novorossiysk, Russia on the northern coast of the Black Sea. In addition, the so-called Baku-Supsa early pipeline, opened in the spring of 1999. This limited-capacity pipeline was designed to carry “early” oil from Western Caspian sites to Supsa, on Georgia’s Black Sea Coast.

With regard to the Eastern Caspian, the Caspian Pipeline Consortium, consisting primarily of Chevron, other oil companies and Kazakh and Russian state companies, was well under way by the late nineties in developing a pipeline (CPC pipeline) from the oil fields of western Kazakhstan through Russia to Novorossiysk. The United States extended strong support to this project, which opened in 2001.

This is evidence that the U.S. never had an “anti-Russia” policy in the Caspian. But the U.S. has insisted that the sovereignty of new states in the region be respected and that those states have the ability to freely export their resources.

Finally, the United States had a strong interest in the development of a Trans-Caspian gas pipeline (TPC) from Turkmenistan, across the Caspian Sea to Baku, which would then run parallel to the BTC to Turkey. This pipeline would have transported natural gas into Turkey, easing its reliance on Russia and Iran for gas supplies at a time of rising demand for gas. In spite a lot of false starts, the TPC never got off the ground. President Saparmurad Niyazov, the mercurial late President of Turkmenistan, never was fully committed to the project. He was wary of recriminations and retaliation from Russia and Iran, which were Turkmenistan’s principal gas customers. In retrospect, Azerbaijan never had much interest in a Trans-Caspian pipeline, since it had its own gas in the Western Caspian, and, indeed, a pipeline will soon open mirroring the BTC route, to ship Azeri gas into Turkey, and perhaps ultimately into Europe.

The BTC pipeline became the centerpiece of U.S. Caspian energy policy.

The United States, despite criticism from several quarters strongly supported construction of the BTC pipeline, because it clearly met U.S. policy objectives. The BTC pipeline was consistent with the policy of multiple pipelines. It avoided all major pipelines from the Caspian going through Russia and into the Black Sea. It also avoided a major pipeline going through Iran. In addition, Turkey strongly supported the BTC, because it would keep additional large tankers from exiting the Black Sea through the narrow straits of the Bosporus, would provide transit fees to Turkey and would help to develop Eastern Turkey.

United States Actions in the Region: Carrots and Sticks

The sticks

On the US side, there was less pressure to build a pipeline through Iran, but some companies would have clearly preferred this alternative. The U.S. position was that it was unclear that an Iranian route would be less expensive than the BTC pipeline, but that, in any event, a pipeline through Iran would be a violation of the Iran-Libya Sanctions Act (ILSA). U.S. officials argued that a pipeline through Iran would be foolhardy for both geopolitical and commercial reasons. Why would companies want to take the commercial risk of transporting oil through Iran? How could the U.S. grant a waiver under ILSA that would subject new sources of oil to the whims of an Iranian Government? Even though some in Europe still believe that pipelines through or from Iran are still viable, recent history makes it clear that U.S. policy regarding transit through Iran was absolutely correct. Western European countries, particularly Britain and France, voiced concerns about U.S. Caspian policy regarding the American role in encouraging a specific route, as well as its policy towards Iran. French and British officials in private meetings took the position, similar to several companies, that the U.S. should not let politics interfere with commercial decisions. A high-level official at Whitehall said to a group of American officials that “Tony Blair may be Prime Minister, but we are all “Thatcherites”. The view that commercial and political issues are not related would appear to be rather naïve, if not cynical. How can commercial decisions be made without considering Turkey’s views on transit through the Bosporus? How can commercial decisions be made with respect to building a pipeline through Iran without considering the “politics” whether domestically or in Iran? Recent events have made perfectly clear that constructing a pipeline through Iran would have been foolhardy and dangerous.

The carrots

Ultimately, BP, as the manager of AIOC, came to realize that BTC was the only alternative for the transit of oil from the Western Caspian.

However, the U.S. Government did more than beat the companies’ with sticks to force them to accept BTC. The U.S. took many constructive steps to help make the project possible.

Perhaps, the biggest breakthrough came with respect to cost of construction. Turkey’s cost estimates for construction of the pipeline were significantly less than AIOC’s estimates. The U.S. took the position with Turkey that if it believed its numbers and wanted the pipeline to be constructed, it should give a formal guaranty that costs would not exceed a set amount. After much negotiation, Turkey agreed in principle to a cost guarantee and ultimately agreed to guarantee the cost of the Turkish portion of the pipeline. This made sense because the Azerbaijani and Georgian portions of the pipeline would have to be built even if the pipeline were to go to Supsa. The U.S. role in conceiving and obtaining the guarantee gave it considerable credibility with the companies. Turkey also attained significant credibility with the companies that it was serious about the pipeline.

In addition, U.S. government agencies, the Overseas Private Investment Corporation (OPIC) and Export-Import Bank provided financing and, in the case of OPIC, political risk insurance for the project. Funding in the form of loans was also made available by the World Bank and European Bank for Reconstruction and Development.

A third area where the United States played a constructive role was in working closely with the leadership and other officials of the three transit countries; Azerbaijan, Georgia and Turkey.

The U.S. helped at various points to further the negotiations of the intergovernmental agreement among the transit countries as well as the host government agreements between AIOC and each of the three transit countries. These agreements provided the political and legal foundation for the pipeline, without which financing would have been impossible and the pipeline would not have been commercially feasible.

There can be no question that BTC has been a success from the standpoint of United States energy policy. The Caspian basin provides a necessary alternative source of energy that can provide a significant percentage of increased world demand for oil over the next several years, and BTC provides an outlet for these resources that neither traverses Iran nor contributes to an over dependence on Russia for energy supply.

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