Ilya Zaslavsky: Will the Baku-Novorossiysk oil pipeline ever revive?

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During the visit of Vladimir Putin to Azerbaijan, the hosts decided — as one might well expect - to make a pleasant public gesture in a mutually painful issue – the transfer of oil via the Russian territory. But this gesture is rather pragmatic and comes from what is beneficial for Azerbaijan today.

In a talk with journalists Azeri Industry and Energy Minister Natik Aliyev has promised that in 2006 Azerbaijan will transfer no less than 3 mln tons of oil via Baku-Novorossiysk pipeline. He said that this year the country may increase its oil export via Russia and noted that all depends on the launch of the Baku-Tbilisi-Ceyhan (BTC), a mainstream oil exporting line.

As you may know, the Baku-Novorossiysk oil transfer was agreed on by the governments in 1997: some 5 mln tons of oil a year. In 2005 the pipeline transferred some 4.1 mln tons of oil. Operating the line are the State Oil Company of Azerbaijan (SOCAR) and the Azeri International Operating Company (AIOC), the operator of the Azeri-Chirag-Guneshli oil fields. As soon as BTC is launched AIOC will stop pumping oil via Baku-Novorossiysk.

During his mostly benevolent speech Aliyev made some substantial remark that, given growing oil outputs, Azerbaijan is considering all possible ways to export crude oil worldwide – one way is Baku-Novorossiysk. “In 2006 we are planning to transfer at least 3 mln tons of oil through the pipeline. All will depend on the launch of the Baku-Tbilisi-Ceyhan pipeline. This projects is being delayed a bit and we expect that the first tanker with Azeri oil will be dispatched from Ceyhan in May-June 2006,” Aliyev said.

One should note here that the launch of BTC is dragging on and on. This 50 mln ton/year line was first to be launched in late 2004. The latest report says that the first tanker will be dispatched no earlier than May 27 2006. Saying this was Turkish Energy and Natural Resource Minister Hilmi Guler, who also said that as of now the oil has gone no further than the Erzincan section.

Reverting to Natik Aliyev, let’s point out some terms and remarks he made. He said that the applications for oil transfer via Baku-Novorossiysk are made every quarter and the transfer may be raised in the future. “Today the project (BTC — author) is being delayed and in order to export our oil to the world markets we are now employing other routes, including the northern line via Russia.” “I think we’ll pump over 3 mln tons of oil via Baku-Novorossiysk,” Aliyev said.

He said that in 2005 they transferred 4.1 mln tons of oil via Baku-Novorossiysk (operative since Oct 25 1997) and charged $15.67 per ton. In the previous years they transferred 2.5-2.7 mln tons a year. The surge of oil from Azerbaijan is due to enhanced production at Azeri-Chirag-Gunashli, three oil fields on the Caspian Sea shelf. At least 21 mln tons will he produced there in 2006.

One more oil transfer route is Baku-Supsa, a line transferring almost 6.5 tons of oil a year for $3.2/ton since 1999.

Concerning the possibility of a compromise with Transneft, Aliyev said: “We are working with them for the future operation of the pipe and there are certain proposals. All will depend on the economic estimates of the volume/cost ratio.” “The present cost is good for us. But if Russia suggests raising the cost, we may heavily slash the volume. This will not be good for us, especially given the launch of BTC,” Aliyev said.

He noted that Azerbaijan is losing from this route anyway. “In Novorossiysk the high-quality Azeri oil mix with the lower-quality Russian and Kazakh oils and is sold as Urals. The difference in price between Azeri Light and Urals is $4-5/barrel. Of course, it would be important for us to send high-quality oil and to get an adequate quantity of adequate oil. But this is a general problem in Novorossiysk, where they have no quality bank and cannot satisfy all oil producers and owners,” Aliyev said. He noted that this is a general problem in Russia, who cannot organize an oil quality bank.

Aliyev said that Baku-Novorossiysk is a strategic route for Azerbaijan and “will go on for a long time.” It would be more precise to say that Baku-Novorossiysk is just one of strategic export routes for Azerbaijan.

Aliyev said many things that can be taken as both benevolent and not so benevolent for Russia, as if he was speaking of an imposed and a self-imposing partner.

“This route is important for us to ensure the flexibility of oil transportation. Azerbaijan’s transportation capacities are yet lower than oil production potential. Today we are often forced to limit oil production for lack of adequate pipeline capacities,” Aliyev said.

This ambivalence is not coincidental. Azerbaijan’s oil revenues make up 70% of its GDP, which has grown by ¼ against 2005 to 11 bln of denominated manats (some $12 bln). While they in Russia are deciding what to do with oil dollars and are arguing about stabilizing fund, they in Azerbaijan have had a state oil fund for five years already. The assets of the fund exceed $1.3 mln, with huge money spent on various real and far-fetched social programs.

Money is a specific if not universal way to be independent. “Azerbaijan is already using its oil-gas potential, and the recent energy crisis in a number of countries has shown that our country is getting increasingly important as a stable energy source,” Azeri President Ilham Aliyev said in Baku last week. “This is a chance for Azerbaijan and we must make the best of it,” he said.

While making various energy compromises with Moscow, they in Baku are seriously welcoming the EU’s interest in gas import diversification clearly expressed by EU Commissioner Benita Ferrero-Waldner during her last visit to Azerbaijan as well as by other EU commissioners and national energy ministers. One possible way is to reanimate the Trans-Caspian gas pipeline, an idea first expressed in mid 90 of XX — a gas pipeline that would run via the bottom of the Caspian Sea, would connect the gas flows of Kazakhstan, Turkmenistan and Azerbaijan and by bridging the eastern and western coasts of the sea would pump gas from the region via Turkey to Europe. At first, the pipe might pump some 30 bln c m a year. The project would cost some $4 bln, not a big sum for oil and gas rich Azerbaijan, Kazakhstan and Turkmenistan.

No surprise that Russia reacted immediately. Feb 22 2006 Russian Energy Minister Viktor Khristenko said that the laying of the Trans-Caspian pipeline is possible only after the determination of the Caspian Sea status. “In any case, to be able to create a Trans-Caspian system and, particularly, to lay such a pipeline, we’ll have to clearly understand how to settle the problem of the Caspian Sea status,” Khristenko said in Baku.

He said that all the regional states are working to this end, but to date they have agreed just on demarcating lines for the use of mineral resources by Kazakhstan, Russia and Azerbaijan. “Other projects will need comprehensive international legislation concerning the situation in the Caspian Sea,” Khristenko said.

Khristenko said that to lay the pipeline is not an end in itself. “On the one hand, we should not oversimplify the technical problems, on the other, we should not turn everything into politics as there is a good deal of economy here,” Khristenko said.

But, in my opinion, Russia should not just stick to restriction by pleading ecology or other obstacles. The key to the problem of rivalry in the world energy market is in finding a balance between practically forcible methods of prevention and purely economic methods of western fashion. For example, by making its pipelines more competitive Russia will be able to offer lower tariffs to its CIS neighbors.

Russia must use its 2006 presidency in the Big 8 as a way to offer more acceptable energy security definitions and vectors to those consuming energy in the west, or the CIS and the EU will find their own ways.

Feb 26 2006 Kazakhstan and Azerbaijan coordinated a document on Kazakhstan’s involvement in BTC. The two presidents will shortly decide when the document will be signed, reports CEO of KazMunayGas Kairgeldi Kabyldin.

As said above, 1 mln barrel/day BTC is to be launched May 27 2006. Half of its transfer capacity may be given for Kazakh oil, while the general capacity may be raised to as much as 1.7 mln barrels of oil a day.

The first supplies of the Kazakh oil via BTC may be started as early as 2007 with the transfer of part of the TengizChevroil oil from the Tengiz field. But the large-scale export from Kazakhstan will be launched in 2010 from Kashagan, a field operated by four shareholders of the BTC operating company – ENI (5% of BTC), ConocoPhillips (2.5%), Inpex (2.5%) and Total (5%).

Kazakhstan, who uses no more than 30 mln tons of oil a year will produce 100 mln tons by 2010 and as much as 150 mln tons by 2015 and is planning to export the remainder in full. Even if these figures are overstated, the “big oil” from Kazakhstan will actually rush in a very big flow.

In 2006 Azerbaijan will produce over 30 mln tons of oil and in 2008-2009 twice as much. Of the total output, 6.2-6.4 mln tons are processed, while the rest is exported.

Industry and Energy Minister Natik Aliyev says that for the “big” oil from Kazakhstan they will build a special infrastructure — a new terminal in Atirau with a capacity of 1 mln barrels of oil a day, a system of sea shipments and an oil transit point in Azerbaijan to be linked to BTC. “We may also build an oil-tanker terminal for the oil from Kashagan. This depends on the results of the analysis of the country’s terminal capacities,” says Aliyev.

Presently Azerbaijan can transfer 25 mln tons of oil a year to Dubendi, Forest Harbor, Azpetrol. It also has a BTC terminal in Sangachali, a facility that can transfer 50 mln tons of oil a year. And whoever owns this stuff — if need be — can undertake the expenses and risks for building and operating an additional infrastructure for raising the efficiency of Actau-Baku corridor to export Kazakh oil via Azerbaijan (the corridor will require the building of 63,000 ton-dead-weight tankers, durable moorages, a coast terminal and many other facilities). The oil owners – Total, Eni, ConocoPhillips, Inpex have big experience in shipping oil by sea. And if not allowed to carry oil passing Russia, they will find ways bypassing it.

Ilya Zaslavsky, expert in thermal energy complex