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Time Magazine: Oil’s Vital New Power

EXTRACT: …a new East-West contest… as consequential as the nuclear-weapons face-off of the past: the battle for energy supplies… Shortly before Christmas, Russian President Vladimir Putin forced Royal Dutch Shell to cede control of Sakhalin II, the world’s biggest oil and gas project, to the state-owned giant Gazprom, opening the North Pacific island’s vast resources to Asian markets.

THE ARTICLE

By Vivienne Walt/Baku

In the control room of Azerbaijan’s sprawling oil terminal near the capital, Baku, Bala Mirza sits peering at a fuzzy map on a computer monitor. The outline of Azerbaijan, Georgia and Turkey looks like little more than a jumble of hills and farming towns. But for the engineer, 41, what lies underground has rocked his world: a new 1,100-mile oil pipeline, which in recent months has tied this tiny country on the edge of the Caspian Sea to the huge Western market. “There is a lot of oil and a lot of money,” says Mirza, who spent 14 years earning about $10 a month working on a creaking old Soviet oil rig. “And because there is a lot of money, our lives will surely improve.”

The stakes in Azerbaijan’s new pipeline are far higher than the fortunes of just Mirza and his family. This Muslim republic, directly north of Iran and tucked into the southwest corner of the vast former Soviet empire, is suddenly a central player in one of the West’s most distressing problems: how the U.S. and Europe will secure enough oil and gas to power cities, factories, airplanes and cars–in short, how to keep our entire modern lives afloat. Since last June, hundreds of thousands of barrels of oil a day have surged through a pipeline running from Baku through Georgia’s capital, Tbilisi, to Turkey’s Mediterranean port of Ceyhan. Named the Baku-Tbilisi-Ceyhan (BTC), the $4 billion pipeline is one of the world’s longest and is operated by the British-American oil company BP, with partners that include U.S. oil companies Chevron, ConocoPhillips and Hess. By spring, about 1 million bbl. a day will move down the pipe, and BP could increase that soon after to about 1.5 million bbl. a day. A parallel BP pipeline opened last month to send hundreds of billions of cubic feet of natural gas from the Caspian to Western Europe, in order to break the Continent’s overwhelming reliance on Russia.

As a piece of engineering, the BTC pipeline is a brilliant geopolitical bank shot. Built over three years, the pipeline had to skirt war zones in the Armenian-occupied Nagorno-Karabakh region in Azerbaijan, and in Georgia, which has been in a conflict with South Ossetian separatists. Then there were the engineering issues: the pipeline had to pass under about 1,500 rivers. At one point BP hired 400 archaeologists to sift through the mountain of ancient artifacts unearthed along the way. Equally daunting was the political wrangling: two of the three countries changed Presidents during construction, requiring lengthy renegotiations over the deal.

But to the countries and the global oil companies, the benefits are so compelling that they trump politics and old ethnic rivalries. The Caspian’s oil and natural gas reserves, which some estimates have put as large as 200 billion bbl. (vs. 260 billion in Saudi Arabia), could deliver economic independence to the South Caucasus region and energy independence to the West. “This is about diversifying energy supplies,” says Michael Townshend, a BP executive who ran the project in Baku until last year. “It is not from the Middle East and it is not from Russia.”

Fifteen years after the Soviet Union’s collapse, it’s tempting to think of the cold war as history–until you land in Baku. This is the front line of a new East-West contest, one that is as consequential as the nuclear-weapons face-off of the past: the battle for energy supplies among countries heavily dependent on imported oil and gas, which include the U.S. and the E.U., plus the rocketing economies of China and India. That necessity is a powerful weapon in this new battle. Shortly before Christmas, Russian President Vladimir Putin forced Royal Dutch Shell to cede control of Sakhalin II, the world’s biggest oil and gas project, to the state-owned giant Gazprom, opening the North Pacific island’s vast resources to Asian markets. The $7.45 billion price was small to Gazprom, whose value has soared from $9 billion in 2000 to $270 billion today, after years of record energy prices.

That’s given Russia immense power to dictate terms for much of Europe. In one power play, the Russians briefly blocked gas last winter to Ukraine, leaving millions freezing. In December, Putin threatened to do the same to Belarus unless it began paying Western-level gas prices. Belarus agreed. Infuriated that Azerbaijan’s new BP-operated pipeline to the West bypasses Russia, Putin has said he intends to double gas prices for Azerbaijan, which in turn threatened to stop exporting its oil through the Russian-controlled section of the Baku-Novorossiysk pipeline to the Black Sea. “We want to put an end to this!” says Khosbakht Yusifzadeh, slamming his fist on his desk. He is the aging first vice president of the State Oil Co. of Azerbaijan and spent decades as a Soviet official. The country’s best shot at breaking Russia’s grip is BP’s parallel gas pipeline, which in December began transporting gas from Azerbaijan’s massive Caspian Sea gas field named Shah Deniz. “I see it now,” says Yusifzadeh, looking at a wall map of the Caspian Sea in his office. “A photo of Shah Deniz with the caption: THIS IS THE PLACE THAT MADE AZERBAIJAN INDEPENDENT OF RUSSIA.”

That could take a while. Azerbaijan–which BP says stands to earn about $230 billion from BP’s pipeline during the next 20 years–has rarely been independent either of Russia’s influence or foreign treasure hunters. Baku’s élite included the Rothschilds during the 1890s, when Azerbaijan produced half the world’s oil supply. Oil production slid steadily as the Soviets let the infrastructure rot. Today hundreds of rusted oil derricks and pump jacks, many predating World War II, cram the seafront outside Baku like a scrap-metal forest, with old Soviet tractors turning several wells. The astonishing sight was memorialized in the 1999 James Bond movie The World Is Not Enough. Towering over the area now is a 16,000-ton water-injection platform being built by BP, which will be towed to an oil field 75 miles offshore, where the company expects to pump about 320,000 bbl. a day beginning in April 2008. “This is a time of big change,” says Mushvig Osmanov, 26, an Azeri engineer for BP, standing atop the half-built platform, gazing at the crumbling old oil wells. “Suddenly we have Western styles and tastes.”

Those new energy-fueled tastes are turning Baku into a boomtown, despite widespread poverty in the rest of the country. Regular Azeris, who have an average cash income of $1,140 a year, are reeling from inflation (tomatoes have recently doubled in price). But much of Baku is upbeat and partying. “There’s a mood that Azerbaijan is now sustainable,” says Foreign Minister Elmar Mammadyarov. BP’s operation has brought in thousands of oil workers and businesspeople, mostly British, who pack nightclubs with names like Le Chevalier and Le Mirage to dance with local women dressed in spiked boots and miniskirts. Baku’s billboards announce this season’s store openings, including Harry Winston, Cartier and Giorgio Armani. Others offer 18.7% interest at the Bank of Baku. One evening, I watched a fashion show to open the new store of Escada, the German luxury label. Baku’s rich sipped California Merlot, while models flown in from Moscow walked the makeshift runway. There are 300 apartment buildings currently under construction in Baku and 250 others have recently opened, says Elnur Asadov, a real estate agent who guides me around a new three-story mansion with an indoor swimming pool and sauna. “People buy apartments when the ground is broken and sell when the building is up,” he says. “That way they can double their money.”

The U.S. sees its alliance with a republic of just 8.4 million people–about the same population as New York City–as key to securing energy supplies at a time when China and the rest of Asia are competing for new sources. The Caspian, which is largely unexplored, probably accounts for 7% of the world’s oil reserves, and the oil flowing through the new West-bound pipeline still represents a mere 1% of global supply. But ultimately some of the gas from Khazakstan and Turkmenistan’s much larger natural-gas fields across the Caspian from Baku could flow through BP’s pipelines, turning to the West rather than to Asia. “The pipeline is changing the strategic map in a very major way,” says a senior State Department official.

A glance at the map shows why: Azerbaijan is sandwiched between two energy giants–Iran to the south and Russia to the north–allies and old U.S. foes whose reserves will last decades. The U.S. has three interests in Azerbaijan: securing energy, spreading democracy and fighting terrorism. Vafa Guluzadeh, a former adviser to President Heydar Aliyev, whose decade-long rule over Azerbaijan ended in 2003 when he maneuvered his son Ilham’s succession, remembers translating a phone call from President Bill Clinton to his boss in 1994. “Clinton said, ‘Mr President, we need to diversify the oil pipelines. We need a new route.’ It was all a very strategic plan,” says Guluzadeh, sipping coffee in Baku’s Park Hyatt, where Western and Asian businesspeople fill the $250-a-night rooms.

Thirteen years later, Azerbaijan is one of the few Muslim countries to fight in Iraq alongside American soldiers. The U.S. has financed two radar stations in Azerbaijan, one a few miles from the Iranian border. U.S. Navy SEALs have trained teams to guard the Caspian’s underwater pipelines, and U.S. Customs agents have overseen border and airport security systems. With Baku just a couple of hours’ drive from Iran, “Azerbaijan could be the world’s only secular country with a Shi’ite majority,” says the State Department official.

Azerbaijan might be secular, but it is hardly democratic. Local elections in 2005 and the presidential vote that brought Ilham Aliyev to power in 2003 were both flawed, according to U.N. and American election observers. A free press? Hardly. One afternoon in December, TIME’s team was taken to a police station near Baku and questioned for three hours about our activities. In Baku, the late former President’s face peers down from billboards, and a huge statue of him stands in one of the many Heydar Aliyev parks. On the third anniversary of Aliyev’s death, in December, government television channels aired round-the-clock programming about his life. The footage aired also on large screens on street corners.

But can Azerbaijan grow richer without growing freer? Some Azeris believe Western governments prefer energy security to political freedom, as was sought in the 2004 revolution in Ukraine–a major transhipper of natural gas to Western Europe. “The U.S. will never support democrats in Azerbaijan because of their oil interests,” says Guluzadeh. But Azeris might start to demand more democracy if oil revenues do not trickle down. The country is listed as one of the world’s most corrupt by the Berlin-based Transparency International. “The average citizen is very suspicious of the government,” says a Western official in Baku, who did not want to be named. “But if the oil wealth is not distributed, you will see people wanting a change.”

Back in the oil terminal outside Baku, Bala Mirza, the engineer at the computer monitor, says he has already reaped benefits from the new oil boom. His life is barely recognizable from those days when he earned $10 a month on that offshore Soviet rig. Since joining the pipeline project in 2003, he has bought a car for himself and for his father, who worked in Soviet oil production for 30 years. But the real test of how Azerbaijan has changed will be the future of Mirza’s daughter, who is now 10. “When all our oil is finished, say, in 50 years from now, there should be no problems for her.” So until then, party on, Baku.

Friday, Jan. 12, 2007
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http://www.time.com/time/magazine/article/0,9171,1576858,00.html

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