- The Washington Times - Tuesday, August 12, 2008

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.

“The BTC pipeline rested on the twin goals of not relying upon Russian pipelines and avoiding Iran,” said Bulent Aliriza, director of the Turkey Project at the Center for Strategic and International Studies, a Washington-based think tank.

Both Presidents Clinton and Bush thought the BTC pipeline would make the Caucasus states of Georgia, Azerbaijan and Armenia, all former Soviet republics, “less dependent on Russia and tie them economically to the West,” Mr. Aliriza said.

“If the pipelines could be interrupted or if Russian military attacks enabled it to exert control over the pipelines, then there would be a major change of balance in the Caucasus and in Turkey as an energy hub,” he said.

“If Russians managed to choke oil and gas from the Caspian region, that would be a major strategic achievement involving not just oil from Azerbaijan but also oil and gas from Kazakhstan and gas from Turkmenistan,” Mr. Cohen said. Monopolizing hydrocarbons from the Caspian region has been one of Russia’s top long-term geopolitical goals, he said.

At least three major energy pipelines under consideration today likely face significantly higher hurdles in the wake of Russia’s military attacks on Georgia.

The 420-mile trans-Caspian oil pipeline would bypass Russia by delivering oil from Kazakhstan’s giant Kashagan oil field to Baku, where it would connect to the BTC pipeline. With recoverable reserves estimated at between 9 billion and 16 billion barrels, the Kashagan oil field might be the world’s largest offshore oil discovery since Alaska’s Prudhoe Bay.

The trans-Caspian gas pipeline would deliver gas under the sea from Turkmenistan to Baku.

The 2,050-mile Nabucco pipeline would transport gas from Turkey to Austria via Bulgaria, Romania and Hungary.

Russia’s military action “complicates efforts to diversify energy resources to Europe,” said Gary Schmitt of the American Enterprise Institute, a Washington-based conservative think tank. “People would be far less likely to pour billions of dollars into a pipeline investment in what has become a much more volatile area,” he said. “There is no guarantee that the trans-Caspian projects would be safe and reliable investments in an area that has just become much more unstable.”

Even though Georgia’s oil and gas pipelines are more than 50 miles south of South Ossetia, the Georgian territory that Russian forces invaded last week, “we have to assume that the pipelines are a potential military target of the Russians,” said Clifford Gaddy, a senior fellow at the Brookings Institution. “If they need to, they will bomb the pipelines.”

Georgian officials said Russia dropped at least 30 bombs on the BTC pipeline over the weekend, but none of them hit the underground pipeline. Two days before Russia attacked Georgia, however, Kurdish separatists claimed responsibility for a fire in Turkey that shut down the BTC pipeline, removing its million barrels of oil from the world market.

That has not stopped the price of crude oil from falling. Light crude oil for September delivery fell 75 cents on Monday on the New York Mercantile Exchange, settling at $114.45 per barrel, its lowest close since May 1. Oil closed at $119.17 a barrel Aug. 5, the day before the fire shut down the BTC pipeline.

Military conflict in Georgia will reinforce questions in the minds of oil-producing countries, oil companies and investors, said Mr. Cohen of Heritage.

“If what is happening now had happened in 1996, the BTC pipeline would not have been built,” Mr. Cohen said.

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