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Georgia clash imperils Europe's fuel flow

By David M. Dickson (Contact) | Tuesday, August 12, 2008

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Russia's military incursion into Georgia, a former Soviet republic, signals that it intends to play a much bigger role in the distribution of Central Asia's huge oil and gas reserves to European markets, analysts said Monday.

By increasing instability in the area, Russia has significantly raised the cost of oil and gas pipelines that are on the drawing board. Investors now will be less likely to spend the billions of dollars needed to complete the projects, the analysts said.

Georgia has two major pipelines — one for oil, another for natural gas — that transport petroleum from the energy-rich nations of Azerbaijan and Kazakhstan to European markets.

"The Russian bear is trying to choke the vital east-west energy arteries in the Caucasus, specifically the BTC oil pipeline and the gas pipeline," said Ariel Cohen of the Heritage Foundation.

The Baku-Tbilisi-Ceyhan (BTC) oil pipeline, opened in 2006, transports 1 million barrels of oil each day from Baku, Azerbaijan, on the west coast of the Caspian Sea through Georgia's capital of Tbilisi to Ceyhan, Turkey, on the east coast of the Mediterranean Sea. From there, ships haul the oil to its final destination. This high-quality oil competes with Russian supplies in Western markets.

The South Caucasus gas pipeline, which runs parallel with the BTC oil pipeline through Georgia, travels from Baku to Erzurum, Turkey, where its gas is connected to Turkish grids delivering energy to Europe.

The major benefit of building the two pipelines across Georgia was the ability to bypass Russia and Iran.

In January 2006, Russia cut off gas shipments to Ukraine over a pricing dispute. The pipeline disruption curtailed gas deliveries to Western Europe, calling into question Russia's reliability as a resource provider.

Western governments also wanted to avoid Iran, which was deemed an unreliable partner because of its nuclear program, its theocratic government and international sanctions that have restricted Western investment there.

With strong political backing from the United States, Western oil companies led by BP PLC and Chevron Corp. collaborated with Azerbaijani and Turkish firms to invest nearly $4 billion in the BTC pipeline, which, at 1,100 miles, is the world's second-longest oil pipeline.