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War Threatens Key Pipeline For Crude Oil

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War Threatens Key Pipeline For Crude Oil

August 12, 2008; Page A10

The conflict in Georgia is placing grave doubt on the country’s reliability as an energy corridor bringing Caspian crude to global oil markets.

As fighting between Georgia and Russia escalates, Columbia University Prof. Lincoln Mitchell tells Kelsey Hubbard how the conflict could have larger implications and potentially send energy prices higher.

Some 1.2 million barrels of oil a day flow through Georgia, 1.4% of global crude supply. Attacks could send shockwaves through the world-wide supply chain. Alarm was triggered over the weekend by reports that Russian planes had bombed near a pipeline, Baku-Tbilisi-Ceyhan, or BTC, which brings 850,000 barrels of oil a day from Azerbaijan’s Caspian oilfields through Georgia to the Turkish port of Ceyhan on the Mediterranean Sea.

Commissioned in 2005, the BTC has enormous strategic significance as the first pipeline on former Soviet territory that bypasses Russia. Built by a consortium of Western energy companies, it was strongly backed by the U.S. as a way of loosening Moscow’s grip on the Caspian’s oil wealth. “The United States has consistently supported BTC because we believe in the project’s ability to bolster global energy security,” U.S. President George W. Bush said on the formal launch of the pipeline in 2005.

There was no independent confirmation of the report of the BTC attack, and a spokesman for BP PLC, a key holder in the pipeline, said there was “no evidence” of any damage to the pipeline in Georgia. A Russian official called the claim a “fraud.


Monday, oil prices eased despite the conflict. Light, sweet crude for September delivery settled 75 cents, or 0.7%, lower at $114.45 a barrel on the New York Mercantile Exchange.

The fighting came just days after a blaze broke out on the Turkish section of the BTC, forcing its closure. That led to more crude being pumped through other routes. BP was forced to sharply reduce output of high-quality Azeri light crude from its Caspian fields because of the BTC shutdown.

Paul Horsnell, head of commodities research at Barclays Capital, said that despite the large hydrocarbon resources in the Caspian region, the challenges posed by the fire in Turkey and the war in Georgia suggest it will never be a serious alternative to Middle East oil.

In addition to the 850,000 barrels a day of crude oil that pass through the BTC, some 150,000 barrels a day goes through another, smaller pipeline from Baku in Azerbaijan to the Georgian port of Supsa. Added to that, some 200,000 barrels a day, most of them shipped by barge across the Caspian from Kazakhstan, go by rail from Baku to Batumi, another Georgian Black Sea port. Azerbaijan’s state-owned oil company, Socar, recently opened a new crude-oil terminal at Kulevi that is also served by rail, though it is unclear what its total capacity is.

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In a sign of increasing worries about the state of those routes, the prime minister of Kazakhstan called Monday for shipments to Batumi to be suspended due to the violence. The Baku-Batumi rail link and the Baku-Supsa pipeline both pass close to the border with South Ossetia.

Azerbaijan has in recent days been relying more on a pipeline from Baku to the Russian Black Sea port of Novorossiisk, which doesn’t run across Russian territory. But analysts say that pipeline, which has 100,000 barrels a day capacity, wouldn’t be able to compensate for the loss of the Georgian routes.

Julian Lee, a specialist on the Caspian at the Centre for Global Energy Studies in London, said the violence had “certainly raised concerns about Georgia’s reliability as a transit route.”

But other potential routes are even more problematic.

–Spencer Swartz contributed to this article.

Write to Guy Chazan at [email protected] and Benoit Faucon at [email protected]

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