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THE CAUCASUS & GLOBALIZATION
Zurab GARAKANIDZE
Ph.D. (Econ.), Observer for the Turkish-English Language Magazine Political Reflection;
Observer for the British e-magazine NewsBase
(Tbilisi, Georgia).
REGIONAL ENERGY PROJECTS FOR GEORGIAN-RUSSIAN RELATIONS
Abstract
After the August 2008 war, the Russian government repeatedly announced that it would not talk to the Georgian government on any topic. This article attempts to prove that, by the end of 2012, after reconstruction of the Caspian Pipeline Consortium (CPC), the probability of reviving joint Russian-Georgian energy projects increased. Given the interests of the so-called Kremlin energy lobby in transportation of the increasing flows of Central Asian energy sources and the ecological
threats to the Turkish Straits, the author suggests reviving the Novorossiysk-Supsa-Ceyhan oil pipeline project (along the Black Sea coast).
Also, after introduction of the anti-Iranian sanctions, the possibility of using the North-South Gas Pipeline (Russia-Georgia-Armenia) in the reverse mode grew. This situation is favorable for Russia, Iran, and Armenia, as well as for Georgia and its western allies, as long as sanctions do not extend to Iranian gas.
Introduction
Ankara has announced its intention to work with foreign oil companies and create a fund for protecting the Turkish Straits against accidents. The cost of this plan may exceed $30 billion by some
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estimates. However, the Turkish government, pointing again to the massive spill in the Gulf of Mexico, says the proposed measures are well worth the price. Part of Turkey's plan involves reorienting oil flows away from the Straits and into an overland pipeline—specifically, the Samsun-Ceyhan Oil Pipeline, which is to be built by a Russian-Italian-Turkish consortium along the Samsun-Ceyhan route. But construction of the Samsun-Ceyhan and Burgas-Alexandroupolis oil pipelines has been halted and the increased volumes of Kazakh oil through the CPC need a new export route. This is why we propose reviving the Russian-Georgian-Turkish Novorossiysk-Supsa-Ceyhan oil pipeline project. On the one hand, this scheme is designed to establish a crude oil transportation route to bypass the Bosporus and Dardanelles. While on the other, this project will help to open the deadlock in the tense Georgian-Russian relations.
In July 2011, Turkey hosted an international conference to discuss navigation security issues in the Bosporus and Dardanelles Straits. The event was held in Istanbul and was attended by representatives of about 20 leading foreign oil companies, including international majors and companies based in Russia and Kazakhstan. Those attending the conference agreed on the importance of guarding against environmental accidents and keeping the Turkish Straits open. These waterways are among the busiest sea lanes in the world. According to official statistics, some 154 million tonnes of crude oil and petroleum products passed through the Turkish Straits in 2009. About 51,000 ships sail through the Bosporus and Dardanelles every year, five times more than in 1990. According to a report presented at the Istanbul conference by Turkey's Energy Ministry, an average of 136 ships navigate the Straits every day. Twenty-seven of these are tankers, the report noted.
Emergency Measures for Black Sea Energy Routes
In his opening address at the conference, Turkish Energy Minister Taner Yildiz called for introducing emergency measures to protect the Straits in light of the swelling ship traffic. Over the last 15 years, he noted, some 115,000 tonnes of crude oil and petroleum products have been spilled in the Turkish Straits. He also noted that Istanbul, which is home to 15 million people, is located on the Bosporus. Any accident involving an oil tanker in the area would have grave environmental consequences for the city, he said. Despite this threat of an environmental catastrophe, Turkey does not have the option of closing or tightly restricting shipping traffic through the Straits. Under the 1936 Montreux Convention, which regulates navigation in these waters, the Bosporus and Dardanelles must remain open. Yildiz said at the conference that Ankara was committed to upholding its obligations. He also commented, though, that attitudes had changed because of the disaster that followed the collapse of the Deepwater Horizon drilling platform at BP's Macondo field in the Gulf of Mexico in April 2010. This event highlights the need for new rules, he said. According to the Turkish press, Ankara has announced its intention to work with foreign oil companies to create a fund for protecting the Straits against accidents. The cost of this plan may exceed $30 billion by some estimates. However, the Turkish government, pointing again to the massive spill in the Gulf of Mexico in 2010, says the proposed measures are well worth the price. Part of Turkey's plan involves reorienting oil flows away from the Straits and into an overland pipeline—specifically, the Samsun-Ceyhan Oil Pipeline, which will be built by a Russian-Italian-Turkish consortium along the Samsun-Ceyhan route. This scheme is designed to establish a crude oil transportation route to bypass the Bosporus and Dardanelles Straits and link the Black Sea to the eastern Mediterranean. Turkish authorities assert that oil companies will not suffer losses if they switch from tankers to this route.
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Russian Support for Bypassing the Straits
For years, Ankara has been actively lobbying for the construction of a pipeline from Samsun to Ceyhan. It has achieved some success on this front with the recent signing of a deal with the Russian energy giant Rosneft, which will join Italy's Eni and Turkey's Calik Enerji to build the pipeline. Russia's state oil pipeline operator Transneft will also be involved in the project. Its participation, and that of Rosneft, will ensure that the Samsun-Ceyhan link is filled and therefore profitable. Russia had long resisted the pipeline project, in part because of its own plans to build another bypass route through Greece and Bulgaria. In the face of Turkey's plans to introduce new environmental protection measures for the Bosporus and Dardanelles, however, it seems to have decided to embrace the Samsun-Ceyhan route. This logic is sound: if the pipe were built by other investors and the Straits somehow shut down, Russia would have a very difficult time finding an alternative route for oil exports through the Black Sea. Meanwhile, Russia has not given up on the other bypass line, which would run from Burgas on the Bulgarian Black Sea coast to Alexandroupolis, a Greek port on the northern Aegean coast.
If both of these pipelines were built, they would be able to accept most of the oil that is now transited through the Straits. However, Nikolay Tokarev, the president of Transneft, has said that the cost of pumping oil through the Burgas-Alexandroupolis pipeline is likely to be nearly twice as high as the cost of tanker shipments through the Turkish Straits. He also estimated that the cost of using the Samsun-Ceyhan pipeline would be nearly three times as high. Nevertheless, Eni, Transneft, and Rosneft have agreed to cooperate with the Turkish government on this pipeline venture. Meanwhile, reports from the conference in Istanbul state that U.S. companies have suggested upgrading the Straits rather than establishing transportation routes. A Chevron representative, for example, said that his company was not considering any new routes for fuel oil shipments. (BP, for its part, has prepared a special document on methods of bypassing the Straits, according to an employee of the company's Turkish office.) Turkey, however, has resisted the U.S. proposals. Turkish Environment Minister Veysel Eroglu said: "Freedom of passage through [the Straits] should be controlled in the interests of ecology and for the people of Turkey." However, there is no way to redirect oil flows immediately. Moreover, Turkey will probably have a difficult time convincing foreign energy giants to fork out the many billions of dollars needed to cover the costs of setting up the proposed environmental program and of constructing the pipeline to Ceyhan.
Necessity for CPC Expansion
At the same time, Central Asian energy is strategic, enabling Russia to expand its economic gains in the energy market. Russia's gas and oil fields are aging and production is slowing. Bringing additional reserves online will take both significant time and investment.1
The threat to Russian energy dominance originates in the Caucasus. The Western energy corridor through Azerbaijan, Georgia, and Turkey offers the opportunity for the West to break Russia's grip on Caspian and Central Asian energy. While the BTC and BTE already allow Caspian oil and gas to flow west along this corridor, it might be expanded by trans-Caspian pipelines to tap Central Asia's large deposits. Though such a pipeline route would be a feat of both engineering and politics, it is possible that Russia will view it as a serious threat.2
1 See: B. Rumer, "The Search for Stability in Central Asia," in: Central Asia: A Gathering Storm?, ed. by B. Rumer, M.E. Sharpe, Armonk, 2002, p. 56.
2 See: A.M. Ismail, "Is the West Losing the Energy Game in the Caspian?," CA-CIAnalyst, 6 May, 2009, available at [http://www.cacianalyst.org/?q=node/5100], 12 May, 2009.
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To secure its future as a global energy superpower, Russia needs to reassert itself in the former Soviet regions of Central Asia and the Caucasus, and Georgia creates a strategic chokepoint. If Georgia could be brought in line, Moscow could use its political dominance to cut off NATO's air corridor, the Western energy corridor, into Central Asia and reduce the negative consequences of Russia's declining economic importance for Georgia and the former Soviet countries. The problem for Moscow is that Tbilisi is anything but pro-Russian.
This problem was highlighted by two developments in December 2010. On the one hand, Moscow struck an agreement with the Caspian Pipeline Consortium (CPC) on the expansion of the Ten-giz-Novorossiysk oil export link. While on the other hand, Russia and Turkey signed documents permitting Rosneft and Transneft to join up with Eni and Turkey's state pipeline operator Botaj on the Samsun-Ceyhan project. These events may be linked. The CPC expansion project will increase the volume of oil flowing into the Black Sea, not via the Central Caucasus, but through Russian territory. It will boost the capacity of the Tengiz-Novorossiysk link from its current level of about 36.5 million tonnes per year (733,000 bpd) to 67 million tonnes per year (1.34 million bpd). Most of the additional volumes will come from the massive Tengiz field in western Kazakhstan, which is operated by a Chevron-led consortium. However, some may come from Kashagan, an even larger field in the Caspian Sea. The cost of the expansion project is expected to reach $5.4 billion, a figure that some Russian observers have described as unreasonable. It is also important that the Russian government needs CPC expansion to block the possible transportation of "big Kashagan oil" via the South Caucasian routes. But Astana is of a slightly different opinion. As underlined by Professors V. Papava and M. Tokmazishvili, "...despite close relations with Russia, Kazakhstan is also very interested in the security of the transportation corridor passing through Azerbaijan and Georgia."3
Burgas-Alexandroupolis Failure
Moscow resisted the plan for years, but agreed to approve it after Transneft managers, along with First Deputy Prime Minister Igor Sechin, struck a deal with Chevron that provided for crude oil from the Tengiz field to be transported by tanker from Novorossiysk to Burgas for loading into the Burgas-Alexandroupolis link. Then in 2010, Bulgarian Prime Minister Boiko Borisov, who was appointed in July 2009, said he would rather not go ahead with the pipeline project. He said it posed an unacceptably high risk of pollution for the magnificent beaches of southern Bulgaria. This would endanger the tourist business, which is much more important for the country than the "pittance" of 36 million euros ($49 million) per year in transit fees from the pipeline, he said. There is an obvious and simple alternative to Burgas-Alexandroupolis—namely, continued use of the Bosporus and Dardanelles Straits. However, Ankara is seeking to limit oil shipments through these channels. Initially, Moscow openly objected to the Turkish position and accused Ankara of violating the Montreux Convention, which guarantees freedom of passage for civil transport through the Turkish Straits. These protests failed to move Turkish officials, who remained unwilling to accept the risk of increased tanker traffic. Signs of rapprochement appeared in 2009, when Russian Prime Minister Vladimir Putin and his Turkish counterpart Recep Tayyip Erdogan signed an agreement that gave Russia's state-run natural gas monopoly Gazprom the right to build a section of the South Stream pipeline in Turkey's section of the Black Sea. In exchange for this, Putin agreed to Ankara's insistence on using the Sam-sun-Ceyhan pipeline for shipments of Russian oil. Sechin, who had long opposed the Turkish bypass route, publicly expressed his displeasure with the deal. However, Putin appears to have decided that
3 V. Papava, M. Tokmazishvili, "Russian Energy Politics and the EU: How to Change the Paradigm," Caucasian Review of International Affairs, Vol. 4 (2), Spring 2010, p. 106, available at [http://www.cria-online.org/Journal/11/ Done_Russian_Energy_Politics_and_EU_How_to_Change_the_Paradigm_by_Vladimer_Papava_and_Michael_Tokmazishvili.pdf].
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it is more important to please Alexei Miller, the head of Gazprom. This is perhaps because South Stream is meant to serve the important strategic purposes of bypassing Ukrainian transit routes and of competing with EU's Southern Gas Corridor, a pipeline projects designed to reduce European dependence on Russian gas.4
It appears that Russia has abandoned the Burgas-Alexandroupolis project in favor of the Sam-sun-Ceyhan pipeline and Turkey's program for protecting the Bosporus and Dardanelles Straits. In so doing, it has also made a point about its relationship with one of its main post-Soviet partners—Bulgaria.
So it would be good if Georgia's energy policy were transformed into a rational policy. In this regard, and according to the Georgian government's "10-Point Strategic Plan,"5 in the coming years, the country should become as a regional energy and transport hub. For that purpose I will discuss two projects:
(1) an alternative route for Kazakh oil in the Central Caucasus: the Novorossiysk-Supsa-Cey-han Oil Pipeline, and
(2) the EU's Southern Gas Corridor and the Russian-Armenian North-South Gas Pipeline In-terconnector project.
Alternative Route for Kazakh Energy Resources in the Central Caucasus: The Novorossiysk-Supsa-Ceyhan Oil Pipeline
The forgotten proposals for the Novorossiysk-Supsa-Ceyhan pipeline along Black Sea coast deserve a second look because the Caspian Pipeline Consortium's (CPC) Tengiz-Novorossiysk oil pipeline threatens the ecology of the Turkish Straits.
Along with Azerbaijan, Kazakhstan is vitally interested in diversifying its options for oil and gas deliveries to world markets and in reducing its dependence on transit routes through Russia. To some extent, it has succeeded; it has, for example, been exporting oil to China via the Atasu-Alashankou pipeline since 2006. However, the growth of production at the Tengiz and Karachaganak fields, along with the promise of future output from Kashagan, has created a powerful incentive for the creation of an additional export route through the Central Caucasus.
Since the disintegration of the U.S.S.R., Kazakhstan has exported most of its oil via Russian territory using two high-capacity pipelines. One of these is the Soviet-built Atyrau-Samara link. The other is the conduit from Tengiz to Novorossiysk built by the Caspian Pipeline Consortium (CPC).
The CPC was meant to allow Kazakhstan to export more oil, especially production from the Tengiz field. Since the pipeline ends at the Black Sea coast, however, the oil must then be loaded onto tankers for transport through the Turkish Straits to the Mediterranean market. Recently, many shippers have favored continuing this arrangement.
The CPC provides export of Kazakhstan and Russian oil. During its ten years' of operation, more than 2,500 tankers have shipped almost 270 million tons of raw materials to consumers from the sea terminal near Novorossiysk, Russia. In July 2011, implementation of the project to expand
4 See: Z. Garakanidze, "Successful Visit of the EC High Level Officials to Azerbaijan and Turkmenistan," English-language magazine Political Reflection (Turkey, Ankara), Vol. 2, No. 1, March, 2011, pp. 49-52.
5 See:"10 Point Strategic Plan of the Government of Georgia," available at [http://www.government.gov.ge/ index.php?lang_id=geo&sec_id=234&info_id=33014].
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the capacity of the petrowire system, which was expected to come to the end in September 2012, began.
The CPC project is one of the most successful in the energy sphere in post-Soviet territory. Application of advanced organizational and administrative technologies, modern and reliable equipment, and highly professional and responsible personnel are its main advantages. For 10 years, the Tengiz-Novorossiysk oil pipeline, with a total length of 1,511 kilometers, has been operating without uniform failure. The current CPC reconstruction project has been developing taking into account the prospect of a 2.5-fold increase in its initial throughput to 67 million tonnes of oil annually, and of oil with anti-friction additives to 76 million tonnes.6
Bosporus Bypass May Help in Conflict Resolution
At present, reconstruction at a number of the CPC pipeline facilities is two months ahead of schedule. In particular, around 20% of the work has already been completed at the Kropotkinsky pumping station. There are plans to complete modernization and launch operation in September 2012. The expansion project is being implemented without a halt in oil swapping.
However, Ankara is wary, especially in light of the mentioned campaign to expand the CPC's capacity. It would instead like to see Kazakhstan crude oil shipped across the Black Sea for loading into the planned Samsun-Ceyhan pipeline. Russia, meanwhile, has previously urged Kazakhstan to use the planned Burgas-Alexandroupolis pipeline.
All of these options pose certain problems. Turkey opposes the first on the grounds that it would put too much strain on the Bosporus and Dardanelles Straits,7 while Russia and Kazakhstan have yet to make specific throughput commitments to the Samsun-Ceyhan project. Bulgaria, for its part, has effectively blocked the Burgas-Alexandroupolis scheme.
As such, Georgia, Russia, and Turkey ought to team up for talks on another alternative—an oil pipeline connecting Novorossiysk, Supsa, and Ceyhan along the Russian and Georgian Black Sea coasts. This one, which virtually no one remembers, calls for moving Kazakhstan oil along the Georgian Black Sea coast from southern Russia through Abkhazia, a breakaway region of Georgia, to Turkey. The idea gained some popularity in the 1990s but was later abandoned. It is worth reviving though, now that work on the CPC expansion project has begun.
The alternative pipeline would also be cost-effective. Russian experts have calculated its cost at $600 million, compared to $30 billion for the proposed Turkish Straits fund, $2 billion for Samsun-Ceyhan, or 1 billion euros ($1.44 billion) for Burgas-Alexandroupolis.8
Additionally, the pipeline would generate additional transit fees for both Moscow and Tbilisi. Russia could use these revenues to recoup its losses from the Azerbaijani pipelines, while Georgia could use its share to cover costs related to reunification with Abkhazia.
It is worth noting, however, that unless the problem of Abkhazia's status vis-à-vis Georgia is resolved, the Novorossiysk-Supsa-Ceyhan project will not be able to gain any momentum.
6 See: Z. Garakanidze, "Protecting the Turkish Straits," NewsBase, Week 28, 21 July, 2010, p. 4.
7 See: E. Ismailov and V. Papava have underlined: "Practically from the very moment of the inception of the idea of transporting Caspian oil to the West and the construction of oil pipelines bypassing the territories of Russia and Iran, Azerbaijan, Georgia and Turkey appeared as one 'team'..." (E. Ismailov, V. Papava, "A New Concept for the Caucasus," Southeast European and Black Sea Studies, Vol. 8, No. 3, September 2008, p. 293).
8 See: Z. Garakanidze, "Important Step Has Been Made in Supply and Transit of the Shah Deniz 2 Gas," Political Reflection, Vol. 2, No. 4, December, 2011, pp. 24-27.
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The EU's Southern Gas Corridor and the Russian-Armenian North-South Gas Pipeline Interconnector Project
In 2010, the Georgian parliament approved changes to the Law on Privatization of State Property. As a result, the Russia-Georgia-Armenia natural gas pipeline, or the so-called North-South Trunk Pipeline, was removed from the list of state-owned assets not eligible for sale. A number of experts have noted that privatization of the pipeline would serve no real fiscal purpose for Georgia. The sale would probably generate no more than $250-300 million in non-tax revenues for the Georgian budget, given that the initial price discussed in 2005, when Tbilisi first attempted to sell, was $200-250 million. What, then, would be the benefits to buyer and seller? From an economic point of view, privatization entails few risks. On the contrary, Tbilisi would probably opt to sell the pipeline to a private investor willing to invest tens of millions of dollars in its rehabilitation. This would enhance the quality of gas flows, which would, in turn, improve Georgia's standing as an energy transit state, as is indicated in the government's 10-Point Plan. But in geopolitical terms, sale of the North-South Trunk Pipeline to an investor from Russia or any of its allies would pose certain challenges for Georgia and its Western allies. For this reason, some analysts have speculated that the quick decision to prepare for privatization was a result of political pressure. How can we avoid such an influence?
A Possible Iran-Armenia-Georgia-Russia Interconnector Project
At present, the only place where Caspian and Russian gas transport network intersect is in Georgia. In that country, the North-South Trunk Pipeline, which runs from Russia to Armenia via Georgia, crosses the South Caucasus Pipeline (SCP), which is currently pumping gas from the first stage of Shah Deniz (SD1) and which will direct gas into Nabucco or the Trans-Anatolian Gas Pipeline. The point of intersection is near the village of Jandara, near Gardabani. The North-South Trunk Pipeline begins in the southern Russian city of Mozdok in Russia and terminates at the Armenian-Georgian border. The 235-km conduit includes two pipes—one with a diameter of 1,200 mm and a second or spare tube with a diameter of 700 mm. Most of the gas transited through these pipes is now delivered to Armenia, as Georgia has been receiving SD1 gas since 2007. Following the collapse of the Soviet Union, the pipeline operated far below capacity. While the design capacity of both pipes comes to 18 bcm per year, the network pumped only 1.7-1.9 bcm per year in 2007-2010. (Even in Soviet times, the maximum annual transit volume was 9.5 bcm per year.) If it were connected to the SCP, this pipeline could be used to channel some of the gas that Russia might have exported via South Stream into Nabucco or the Trans-Anatolian pipeline. Increasing gas transits would also be profitable for Georgia. The country already receives 10% of the gas pumped through the North-South Trunk Pipeline as a transit fee. In recent years, gas consumption in Georgia has averaged about 1.73 bcm per year, while Armenia has used about 1.93 bcm per year. This implies that the state-owned Georgia Oil and Gas Corporation (GOGC) receives approximately 190-193 million cubic meters per year of free gas, equivalent to about 11.0-11.2% of the country's gas consumption, which it then monetizes through sales to the local population.
The volume of gas transited through Georgian territory is slated to rise in 2017, when SD2 begins production. At that time, the SCP link, which has only been pumping 4.7 bcm in 2011, will see its capacity increase dramatically to 20 bcm per year. An agreement signed between Turkey and Azer-
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baijan on the transit and volume of SD2 gas in June 2010 provides for the pipeline to operate at full capacity. Linking the SCP to the North-South Trunk Pipeline would improve the latter's prospects, while also giving Russia access to a new high-capacity export route and improving access of the Nabucco and Trans-Anatolian pipelines to gas supplies. Making the connection would be easy and would not restrict supplies to Armenia, especially since that country is now able to receive gas from another supplier—namely Iran. If this can be done, the competition between Southern Gas Corridor's projects and South Stream would subside, and the two projects would instead complement each other. That is, rather than working against the Southern Gas Corridor, Gazprom would be able to use the EU's pipelines to acquire a new export route to Europe. We fully agree with the idea, according to which "...harmonizing gas pipelines is even more important given that it is far from clear whether the Russian gas transport system will be sufficient to transport expanded volumes of Central Asian gas during the first part of the next decade."9
Moreover, connecting the SCP to the North-South Trunk Pipeline would allow the creation of a wider network in which Iran could serve as a supplier, as long as western anti-Iranian sanctions are against the oil exports and do not extend to Iranian gas. Iranian gas pumped through the Tabriz-Meghri line to Armenia could then be pumped to the Georgian village of Jandara, near Gardabani, via the Armenian network and redirected into the SCP for loading into the Trans-Anatolian or any of the Southern Gas Corridor's gas lines, just as gas from Russia could be pumped through the North-South line for transfer to the SCP. This would be cost-effective, as it would make use of existing pipes rather than require the construction of new lines.
Conclusion
Not only is energy a source of economic wealth, it also translates into political power. However, coercive energy diplomacy is not the only source of leverage that Russia has against Georgia. Having assumed responsibility for mediating Georgia's separatist conflicts with Abkhazia and South Ossetia, Moscow has the ability to manipulate these internal disputes for political gain.10
Now Georgia has a chance to use its geographical location to promote the country's reunification. Development of the Central Asian energy projects and growing shipments of Kazakh oil via the Turkish Straits give Tbilisi the chance to start a dialog with Russia on the topic of using Georgian territory, including the occupied regions, in which the West could be involved. For that purpose, the Novorossiysk-Supsa-Ceyhan oil pipeline project must be revived. Also, according to the Georgian government's strategic plan, in the coming years the country should become a regional energy and transportation hub. To that end, the EU Southern Gas Corridor's projects, via the SCP as an intercon-nector, must be linked up with the Russian-Armenian North-South Gas Pipeline, which can also be used as leverage for using Iranian and Armenian economic interests in future Georgian-Russian energy cooperation.
9 V. Papava, M. Tokmazishvil, "Pipeline Harmonization Instead of Alternative Pipelines: Why the Pipeline 'Cold War' Needs to End," available at [http://www.ada.edu.az/biweekly/issues/150/20090327030535315.html].
10 See: K. Preobrazhensky, "South Ossetia: KGB Backyard in the Caucasus," CA-CIAnalyst, Vol. 11, No. 5, 11 March, 2009, p. 3.
