Oil Shortfall in Caspian Sea Basin May Doom U.S.-Backed Pipeline Plan

An ambitious U.S. plan to link the huge oil fields of the Caspian Sea basin firmly to the West is in danger of unraveling because not enough oil has been discovered in the region to support a pipeline, independent analysts say. And a recent increase in oil prices isn’t enough to rescue the project.

A failure of the U.S. initiative could complicate shipments of oil and gas to the West from what many experts have said is one of the world’s biggest undeveloped sources of crude oil. That, in turn, could tighten supplies and drive up prices.

The U.S. plan, formally launched by President Clinton in November, calls for the construction of a $2.5-billion pipeline to carry the rich crude from the Caspian’s western shores through Azerbaijan and Georgia to the Turkish port of Ceyhan. Undersea pipelines to be added later could feed crude oil and natural gas from Kazakhstan and Turkmenistan, linking those two eastern Caspian nations to the same western export route.

To achieve this grand vision, the Clinton administration finds itself traversing unusual ideological ground. It has rejected shorter, commercially more attractive export routes, promoted the interests of repressive national leaderships, and done little to discourage the notion that some ill-defined U.S. security commitment has been extended to countries far from America’s historic reach.

Supply Falls Short by 2 Billion Barrels

So far, none of this has guaranteed success. Indeed, energy specialists believe that a dearth of new discoveries in key offshore fields means that the volume of crude needed for oil companies to pay for the ambitious project simply isn’t there.

Energy experts calculate that, of the 6 billion barrels of crude oil needed for the Baku-Ceyhan route to make sense economically, only about 4 billion barrels are guaranteed to be there for pumping. And there is no obvious way to make up the shortfall.

Oil industry executives claim that the shortage stems from the slow pace of actually locating the huge reserves that they are convinced lie beneath the world’s largest inland sea--a remote, industrially underdeveloped area where most of the equipment required for oil exploration must be built from scratch or imported.

“Higher prices definitely make development of the Caspian look better, but there probably isn’t enough oil now to justify this pipeline,” said Julia Nanay, a director at the Petroleum Finance Co., an oil industry advisory firm based in Washington.

Added Robert Ebel, an energy specialist at the Center for Strategic and International Studies in Washington: “It’s not a question of price. You’ve got to have enough oil to put through the pipeline, and there just isn’t enough there.”

If the 11-member consortium behind the pipeline can’t find enough oil--and can’t get subsidized financing--the project probably will be shelved, analysts say. And although it isn’t likely to be scrapped entirely because of the vast reserves that someday may be discovered, the grand American plan to tie the region’s new democracies and much of its oil to the West at an early phase would have failed.

For U.S. Diplomats, It’s Pipeline Politics

Despite the possibility of failure, it’s not hard to understand why U.S. diplomats haven’t given up.

For them, the Baku-Ceyhan route is a strategic dream. The route would block Iran from becoming a major player in the Caspian oil bonanza. It would diminish Russia’s centuries-old influence over the area. And it would provide fragile post-Soviet states with an independent outlet to world markets for their oil and gas, tying them to the West in the process.

Best of all, in the diplomats’ view, it would secure Western control over fields that could eventually produce up to 35 billion or more barrels of crude, deposits rivaling in size those of the prolific North Sea.

With these kinds of stakes, the United States has waded knee-deep into a 21st century version of the age-old intrigues that in earlier times turned the remote and wild Caucasus region into a playground for imperial ambition.

The State Department has actively discouraged talk of shorter, cheaper routes from the Caspian to the open seas, especially the shortest and cheapest route of all: through Iran to the Persian Gulf. It has quietly warned against reliance on routes that traverse Russia and has heavily courted the fledgling post-Soviet states that sit atop most of the valued energy reserves.

Clinton, who likes to cite the export of democratic values as a core priority of his administration’s foreign policy, seems to make an exception when it comes to the Caspian. In the past few years, dubiously elected presidents from Azerbaijan (Heydar A. Aliyev) and Kazakhstan (Nursultan A. Nazarbayev) have made high-profile visits to Washington. Clinton also has welcomed Turkmenistan’s president, Saparmurad A. Niyazov, whose personal record as a leader has been soundly trashed in annual human rights reports released by the State Department.

Amid such contacts, many officials from these smaller and distant countries have come to believe that they are slipping under an American defense umbrella, even though U.S. officials insist that no direct commitments have been made. Such talk has unsettled Moscow, which has made veiled references about the dangers of “outsiders” meddling in the region.

Some analysts worry that the ambiguous administration actions are creating a dangerous uncertainty by building expectations about potential U.S. commitments that aren’t really there.

“The State Department is looking at the larger geopolitical picture,” said Geoffrey Kemp, Middle East specialist at the Nixon Center for Peace and Freedom, a Washington-based political think tank. “They’ve worked themselves into a frenzy by justifying the East-West route not only negatively--by excluding Iran and limiting Russia--but also positively, as nation-building for these smaller countries.

“The truth is, you are working with very fragile material.”

While senior Azerbaijani officials frequently equate their country with Kuwait--an oil-rich nation that a U.S.-led coalition rescued from invasion by Iraq--Kemp says a better analogy probably is Lebanon in the 1980s.

“The moment there was trouble [in Lebanon], we got out, and that’s what would happen in the Caspian,” he said. “We’ve got important, but not vital, interests there. I can’t think of a more awkward place in the world to try to extend a hand.”

With the rise of moderates in Tehran and recent U.S. conciliatory moves in response, the wisdom of trying to freeze Iran out of the Caspian’s development also might not be as great as it once was.

Desperately Trying to Make Project Work

The Turkish government, eager for the enhanced regional power inherent in a Baku-Ceyhan route, has discouraged a shorter, cheaper route that would run from Baku, the Azerbaijani capital, to Georgia’s Black Sea port of Supsa. It has cited the environmental risks of supertankers maneuvering through the busy Bosporus strait on their way to the open seas.

Against this political backdrop, the United States is desperately trying to make the economics of the Baku-Ceyhan line work.

The consortium, which is investing up to $12 billion to develop the offshore Azerbaijani fields, initially resisted the Baku-Ceyhan plan as financially unworkable. But the consortium, headed by BP Amoco, reconsidered its position about six months ago in the wake of growing political pressure and is trying to come up with other solutions.

U.S. diplomats and senior consortium executives talk of making up the shortfall by taking crude oil from a variety of other, smaller fields elsewhere in the Caspian. Some talk of barging crude to Baku from modest fields on the Caspian’s eastern shores. Others even discuss the possibility of diverting crude from the huge offshore Kazakhstan field at Tenghiz in the north, oil that is expected to reach global markets via a major pipeline to Russia’s Black Sea port of Novorossiysk.

Independent analysts scoff at some of these options.

“Maybe something magical will happen, but if they think they’ll get [northern] Kazakh oil coming south, then they’re smoking something,” Ebel said.

Consortium executives admit privately that they have few answers and suggest that subsidized financing might be one way to make the pipeline viable. They also hint that if the United States wants the pipeline badly enough, it should explore such options.

Senior Clinton administration officials dealing with the project continue to insist that it will go forward without subsidized financing--although they, too, say they are worried about finding sufficient oil in time.

“Exactly where it’s going to come from is a serious issue,” acknowledged one administration official. “It’s a big problem.”