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Georgia: More trouble in the pipeline

Georgia: More trouble in the pipeline

Last Updated: 12:18am BST 17/08/2008

The crisis in Georgia has focused minds on the supply of oil to western Europe via lines that cross – and avoid – Russia. Russell Hotten considers the prospects for the embattled democracy

The sight of bombed-out buildings and Russian tanks descending on villages in Georgia has underlined that for all its investment potential, this vast stretch of the globe remains a powder keg. Moscow has not just sent a message to several former Soviet states not to step out of line, it has sent a signal to Europe about the fragility and security of its economic interests.

Television pictures of Georgians fleeing the fighting brought forth international condemnation. But less publicised were the Russian missile strikes near the Baku- Tbilisi-Ceyhan (BTC) pipeline, one of several arteries in the the Caucasus that bring oil and gas to the west.

Some 50 missiles struck within a few hundred metres of this key oil transit route. There is no evidence that the Russians intended to hit the BTC, which is 30 per cent-owned by BP, the UK energy major. But it was a salutary warning at a time when the European Union is desperate to reduce its dependency on Russian oil and gas.

The 1,100-mile pipeline, which ships about 90,000 barrels per day and from next year will have capacity for 1.2m barrels per day, is one of the few pipelines from the Caspian region not to cross Russian soil. It ships high-quality crude from eastern Azerbaijan,through Georgia, to the Turkish Mediterranean port of Ceyhan. It is the longest pipeline after Druzhba, which stretches 2,500 miles from south-eastern Russia to Germany.

The pipeline has, in fact, been shut for more than a week due to a fire in eastern Turkey, and should re-open in the next few weeks. The Kurdistan Workers Party claimed it sabotaged the facility, though there are doubts that this was the case. According to Samuel Ciszuk, an analyst at Global Insight: “The entire route of the BTC, the only major oil pipeline from the Caspian region outside of Russia’s control, should now be treated as high-risk, and Turkey’s viability as an energy bridge to Europe has been thrown into question.”

It is likely that the pipeline would have had to shut anyway, due to the closeness of the Russian bombing. Last week BP closed its much smaller Baku-Suspa oil and gas pipeline, which was carrying between 45,000 and 90,000 barrels per day, as a precautionary measure.

The section of the pipeline running from near Tbilisi, Georgia’s capital, to Turkey, was re-opened on Friday, but the oil pipeline remained shut this weekend.

Reports by Turkish newspapers said BP and its Turkish partner Botas International were examining the pipeline this weekend to assess how long repairs will take.

As well as shipping oil from Azerbaijan, the Black Sea ports of Poti and Batumi are also vital transit points for crude from Kazakhstan and Turkmenistan. Estimates from oil traders suggest that the amount of oil now being shipped from these three countries had fallen from 1.3m barrels a day to about 350,000.

It would take a sharp escalation of the Georgia conflict to close the transit routes long term, which is why the oil price remained relatively muted in response to Russia’s invasion. A lot of oil was re-routed by road tanker. The Kremlin, though, will be privately very pleased to have exposed the fragility of the supply network.

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  • Dieter Helm, an energy economist and professor at Oxford University, said last week: “Russia has a very clear strategy and would prefer Europe’s gas to go via Russia and not via independent countries. There is no definite attempt [by Russia] to disrupt supplies. But it is not unhelpful to Russia that there is unrest.”

    Russia is no longer a military superpower, but its vast natural resources mean it will become an energy superpower over the next decade. Russia’s state energy giant, Gazprom, produces 85 per cent of the country’s natural gas and controls 17 per cent of the world’s reserves. The European Union gets 25 per cent of its gas from Russia, and that is set to rise. Britain’s proposal to build a new generation of nuclear power stations is a race to diversify energy supplies and reduce dependency on Russia and the Middle East.

    But until these reactors start coming on stream, from 2017 at the earliest, Britain, with its North Sea reserves dwindling fast, will have to look to places like Kazakhstan if it wants alternatives to Russia. That country’s giant Kashagan oil field, which is being developed by a consortium that includes Royal Dutch Shell and ExxonMobil, was the largest find for three decades when it was discovered in 2000, and will use the BTC pipeline once production begins in 2013. But will Russia resist the urge to try to control these reserves? At the very least Moscow will surely want influence over such a powerful geopolitical resource.

    The BTC pipeline cost $3bn (£1.5bn) to build, but Ciszuk believes that the Georgian troubles will dampen investors’ enthusiasm for pumping hundreds of millions of pounds more into a planned upgrade. Indeed, he says that the pipeline’s vulnerability “could render further foreign investment in [any] oil and gas transport links that bypass Russia too risky”.

    The proposed 2,000-mile Nabucco pipeline, backed by the European Union and running through Georgia, would bypass Russia and take gas via Turkey and Bulgaria to Austria. Moscow has tried to persuade its European gas customers that Nabucco is a red herring and that investors should concentrate on backing pipelines running through Russia. If diplomacy has failed to convince these investors, military action in Georgia may do. Nick Butler, a former chief strategy director at BP and director of energy studies at Cambridge University, says that there is no question that Georgia has “become an investment risk”.

    Helm and other supporters of Nabucco say the answer is not to shelve the project, but to ensure that governments, not private investors, take the lead and defend it. But Gazprom, through its many strategic ventures with European energy companies, now wields considerable lobbying power in Europe’s capitals.

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