Fracas in the Caucasus

In this column, our expert Duncan Sutherland looks at alternatives for oil shipment from the Caspian Sea area in the wake of the Russo-Georgian conflict.

With the conflict dominating the headlines these past weeks, I thought a column on its impact on the geopolitics of the Caspian Basin area and thus, on the energy scenario was warranted.

Of course this column will not try and determine who started the war, or who is in the right. Instead, I shall examine how the conflict might impact the Caspian oil extraction and Caucasian transhipment.

Besides the direct damage, the conflict’s ripples is likely to be felt throughout the Black Sea, Caucasian and Caspian regions, with somewhat paradoxical effects as to who benefits and who is placed at a disadvantage.

The Caucasus:

The fracas in the Caucasus appears to have stabilized, though some reports continue to talk of sporadic clashes. Though the Russian army does not appear to have occupied any of the pipeline routes through Georgia, the Russian Navy still lingers in the Eastern Black Sea. Some reports have claimed that Russian troops have occupied port facilities in Poti, but the Russians have denied this. Although they have not approached the more significant ports of Supsa and Batumi, whoever holds Poti controls exports of roughly 100,000 barrels per day.

Due to the Baku-Tbilisi-Ceyhan pipeline fire in Turkey before the conflict, much of the output has been shifted through the other Georgian pipelines to Supsa or through Russia, underlining the lack of emergency capacity and alternate routes. Intriguingly, Kazakhstan’s state-owned KazMunaiGas acquired full control of the Batumi port oil terminal earlier this year and shut down exports Monday for undetermined reasons. Batumi was not directly threatened by military operations, so Kazakhstan’s decision to suspend its operation seems political.

Several reports hint that one of Russia’s war goals was to weaken foreign confidence in Georgian pipelines and overall reliability. As mentioned above, it has been reported that Poti was occupied. Additionally, the Wall Street Journal’s Guy Chazan has reported that Russian aircraft attempted to destroy a section of the Baku-Tbilisi-Ceyhan pipeline in southwest Georgia, saying that “the bombs narrowly missed the line, but one exploded just 10 feet away from it”. The Guardian says that “Russian warships blocked a tanker loaded with Azeri crude and stopped it from leaving the Georgian port of Poti”. This information comes from the chief of SOCAR, the Azeri state-owned energy firm.

At minimum, these actions represent a blockade to weaken Georgia’s economy. A more sinister interpretation can be that Russia hopes to prevent future investments in the trans-Caucasian pipeline routes by destabilizing the country and disrupting their flow.

Political observers say it would be naive to hope for lasting peace between Russia and Georgia as the optimistically named “frozen conflicts” of South Ossetia and Abkhazia were the cause of this war. Indeed, the space between the Black and Caspian Seas is unlikely to see any sort of lasting peace for some time. Mapping the political, ethnic and religious boundaries of the region results in something akin to a Jackson Pollock painting.

Since 1988, the Caucasus have seen the Nagorno-Karabakh War between ethnic Armenians and ethnic Azeris, ethnic cleansing and even a brief war in Russian Ingushetia, the separation of Abkhazia and South Ossetia from Georgia, accompanied by another bout of ethnic cleansing, and two wars between Russia and the Chechens. Moreover, this is an incomplete list as it leaves out the multiple instances of clan or party based intra-ethnic and intra-polity violence.

Alternatives?

At this point in time, you are likely to ask yourself – who on earth decided to put pipelines through the Caucasian isthmus? Indeed, such troubles complicate the entire route of the BP operated Baku-Tbilisi-Ceyhan pipeline, which was shut before the war due to attacks from Kurdish rebels in Turkey. Oil and gas companies appear extremely foolish to expose multi-billion dollar investments to such high risk. Though it is easy to lampoon the executives, a quick look at the map reveals that this was their best option.

Let us look at the alternatives. Russia’s friendlier geography and existing export facilities appear much more enticing, but Vladimir Putin and Dmitry Medvedev have a difficult relationship with international oil companies. Indeed, the major trans-Caucasian pipelines are owned and operated by BP, who are rather displeased with the Russian government. Similarly, Armenia would not work as it is a Russian ally/proxy, and has unresolved territorial disputes with Azerbaijan, the source of most trans-Caucasian oil.

Alternately, Iran offers a single-country route to the Persian Gulf, with ample infrastructure for offloading and transporting energy to Europe, Asia and North America. If we remove political considerations from the calculation, this option is the most desirable. Unfortunately, multinational oil and gas companies do not act apolitically. Therefore, the steadily increasing United Nations’ sanctions on the country and escalating geopolitical tension over Iran’s uranium enrichment program make this route too risky.

With these options ruled out, there is only one feasible non-Georgian option left. This delightful proposition would lead through Turkmenistan, Afghanistan and Pakistan to the Arabian Sea. This route would be the longest and most expensive to build. Apart from that, the idea of Western companies committing billions of dollars to a highly flammable project through an active war zone and Al Qaeda’s safe haven in northwest Pakistan is a prima facie non-starter.

Looking forward

The US government’s Energy Information Administration estimates that the Caspian Sea regional oil reserves are “between 17 and 44 billion barrels” and proven natural gas resources are approaching 232 trillion cubic feet. This offers a boon to energy companies, and these new supplies are difficult to resist despite the geopolitical problems inherent to their production and delivery to market.

Geopolitically, the Caspian Sea is dominated by Russia and Iran. Each already controls significant proportions of the region’s energy. Azerbaijan, Turkmenistan and Kazakhstan play semi-autonomous parts, trying simultaneously to please the two regional powers and solicit Western capital to develop their own resources. The aforementioned closing of the Batumi export facility by KazMunaiGas offers a good example of the power dynamic. As it was not directly threatened by the conflict, two plausible reasons present themselves. First, Kazakhstan might have done it at the request or warning of the Russian government, which would indicate their desire to keep good relations. Second, Kazahstan might have honestly had no idea how far Russia planned to advance, and was pre-emptively suspending operation to limit potential losses if Russia did attack it.

Russia and Iran have a complex and multifaceted relationship. In the regions this article is concerned with, they simultaneously cooperate and compete for influence. Recent circumstances have created a unique confluence of interests between the two that energy companies and investors should note. Both governments are increasingly reliant on high energy prices. Low oil prices enabled the conciliatory Boris Yeltsin and Mohammed Khatami in the 1990s, while high energy prices have facilitated the rise of Vladimir Putin and Mahmoud Ahmadinejad.
When first invited into the Caspian Sea region, Western governments and companies had a Morton’s Fork to contend with. They could route exports through Russia or Iran, and thus increase the power of these countries in the region and give them a powerful incentive to stabilize the Caspian and Caucasus. Alternately, they could decide to exclude the duo from their extraction and export plans as much as possible. At the time, the weakness of Russia and Iran made this decision seem more desirable. But now the petro-resurgence has empowered those embittered by what they perceive as Western incursion into their spheres of influence.

By deliberately trying to weaken Russo/Iranian influence on Caspian energy supplies and Caucasian export, the concert of diplomats, strategists and energy companies have placed their bets on peripheral countries characterized by instability, unresolved territorial disputes and brittle sovereignty. Moreover, the reach of Western economic, political and military power in the Caspian/Caucasian corridor is limited. So the Azeri-Georgian route has given the regionally pre-eminent powers a strong incentive to destabilize the Caucasus, as doing so supports high energy prices, underlines their importance in the region and cannot be met with effective resistance from oil-consuming countries.