Caspian Oil and Gas Flows to the West Impacted by Russian-Georgian Conflict

By Gustavo Coronel l September 1, 2008

The recent military conflict between Russia and Georgia illustrates the increasing fragility of the world energy equation. For days the major pipelines transporting oil to the Western markets were closed down, decreasing the flow of oil by about one million barrels per day. The crisis served to pressure oil prices upwards, after being in significant decline for more than a month. Although the main flows of oil from Azerbaijan to Western markets have been restored, there is no guarantee that the crisis is over. On the contrary, it could well expand into adjacent territories.

This Russian-Georgian crisis involved some of the states that broke away from the Soviet Union in December 1991, located between the Caspian and Black Seas, primarily Georgia and Azerbaijan. Across the Caspian Sea these countries face larger, independent states, also products of the fragmentation of the Soviet Union: Kazakhstan, Uzbekistan and Turkmenistan. To the north and northwest these countries are encircled by Russia; to the west is the Black Sea and, across the Black Sea, Bulgaria and Romania, while to the south and southeast, they border with Turkey and Iran. The geographic relationship of these states with their neighbors strongly influences the geopolitics of energy in the vast region commonly referred to as Central Asia.

Azerbaijan and Kazakhstan are already primary actors on the global energy scene. Estimates of proven and probable reserves made by the U.S. Department of Energy (2006) indicate a median of some 10 billion barrels of proven and probable oil reserves for Azerbaijan and about 20 billion barrels of oil for Kazakhstan, although possible reserves are much greater, up to 40 billion barrels and 110 billion barrels respectively. Natural gas reserves are also significant: some 30 trillion cubic feet in Azerbaijan and up to 70 trillion cubic feet in Kazakhstan. Turkmenistan, south of Kazakhstan, also enjoys significant gas reserves, up to 80 trillion cubic feet.

So far, Western companies, both U.S. and European, have undertaken the development of these reserves in Azerbaijan and Kazakhstan. In the case of the Azerbaijan oilfields: Azeri, Cirag and Guneshli, control of the operation is in hands of a consortium made up of British Petroleum, Unocal, Statoil, Exxon Mobil and Delta Hess, with a smaller participation by the Russian company Lukoil. In Kazakhstan the Tengis oilfield is operated and developed by a group consisting of Chevron Texaco, Exxon Mobil and the government of Kazakhstan, while the development and operation of the Karachagnak oilfield is in the hands of a group including AGIP (Italy), British Gas, Chevron Texaco and Lukoil.

The access by Western markets to this oil production is another matter. In the case of Kazakhstan, the production is of some one million barrels per day. Almost half of this amount is exported to Western markets through Russian territory, via the Caspian Consortium Pipeline ending at the Russian port of Novorossysk. This pipeline is owned and operated by the Western companies but with increasing bureaucratic control coming from Moscow. The other half of the production is going mostly to Russia (45%) and China (5%). Kazakhstan is in the middle of an oil and economic boom that is both a bonanza and a threat to its longer-term economic health, due to the well-known effects of the so-called “Dutch disease” on countries that become dependent on a single export commodity.

In the case of Azerbaijan, oil production is close to one million barrels per day and is also expanding. Oil is exported through three pipelines, one carrying about 100,000 barrels per day to the Russian port of Novorossysk, one carrying about 115,000 barrels per day to the Georgian port of Supsa in the Black Sea and the main one, the Baku-Tbilisi-Ceyhan (BTC) pipeline, going through Georgia and Turkey, which is capable of carrying up to one million barrels per day to the Turkish Mediterranean port of Ceyhan. In addition, there is a natural gas pipeline, carrying about 180 million cubic feet of gas per day from Azerbaijan through Tbilisi to the Turkish town of Erzurum.

Since the region is a significant component of the global energy equation, any political and/or military event in the region acquires a special significance. During the brief interruption of oil flows through the pipelines of the region due to the Russian-Georgian conflict, losses by the operators of the Azerbaijan oilfields in the Caspian Sea have been estimated at $600 million.

The crisis has been triggered, essentially, by political factors, basically the friction between Georgia and Russia over the separatist attempts made by a segment of the population in the Georgian province of South Ossetia, but there is little doubt that the underlying struggle for political and economic control of the oil and gas production of Azerbaijan is at the root of this and other geopolitical moves in the region. Russia looks at this region as its own political and cultural backyard and has never fully accepted the fragmentation of the Soviet Empire, which once included all of these states. The current military presence of Russia in Georgia is having a significant impact on the flow of hydrocarbons from Azerbaijan to the Western markets and will possibly force this country to reach new political and economic compromises with Moscow.

Although the U.S. is not a dominant geopolitical player in Central Asia, there is no doubt that all and any restrictions to the free flow of energy from this region to Western markets is of concern for the largest petroleum consumer in the world. The volumes that are not reaching their normal destination today will add to the pressure on the availability and prices of oil in the world markets. The U.S. is now concerned at the resurging Russian influence in the region.

The Russian military show of force in Georgia has left the U.S. and its European partners off-balance, without a clearly defined response, a situation not too different from the aftermath of the erection, in a matter of hours, of the Berlin Wall by the Soviets, during the weekend of August 12, 1961. As in that crisis, the reaction of the West to the Georgia crisis has been slow. In 1961 the Berlin crisis caused considerable loss of credibility for the U.S., Great Britain and France, especially among the populations affected by the event. Whether this will be the case in Georgia still remains to be seen.

Gustavo Coronel, who served on the board of directors of Petróleos de Venezuela (PdVSA), has had a long and distinguished career in the international petroleum industry, including in the USA, Europe, Venezuela and Indonesia. He is an author, public policy expert and contributor to

SFPPR News & Analysis.