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New Caspian Oil Likely to Cushion Market, nothing more

After two years of construction, workers are welding together and testing with water the last few sections of a 1,760-kilometer (1,100-mile) oil pipeline that runs from Azerbaijan through Georgia and Turkey.

Seven huge gray tanks that will each hold 1 million barrels of oil have been built just uphill from Iskenderun Bay, where an empty loading jetty is being finished, capping off a US$2.9 billion (euro2.2 billion) project that is expected to bring a flood of Caspian crude to hungry world markets.

The new oil, part of a push to help ease the West's dependence on Middle East crude, is expected to begin flowing in June. But that, experts say, will provide only short-term relief to a world that is gulping down more crude every year and growing increasingly dependent on resources from the unstable Middle East.

With oil prices about US$47 a barrel, "any incremental oil is significant," said David Knapp, senior editor for global oil market analysis at the New York based Energy Intelligence Group. "It doesn't fix the problem, but it does help."

The project, however, was begun as part of a far more ambitious endeavor.

Four years ago, excited oil officials spoke of bringing the huge riches of the Caspian Sea to Western oil markets, and of finds that could rival the production of the Middle East. The drive to discover alternatives to Middle Eastern oil intensified after the Sept. 11 terrorist attacks highlighted potential regional instability.

"There is now greater public pressure to reduce dependence on Saudi and Middle East oil," said Manouchehr Takin, an analyst at the London-based Center for Global Energy Studies.

The recent surge in crude oil prices, driven largely by concerns about spare production capacity and possible supply disruptions, has also powered a search for new sources.

Angola and Brazil are working to take advantage of deep-water drilling technology to develop oil fields and about a dozen other countries, include Chad and Sudan, are trying to exploit new resources.

Canada is expanding oil production from thick tar sands, while Mexico is increasing shallow-water drilling.

One of the greatest hopes had been the former Soviet Union, which now produces more oil than Saudi Arabia, and especially its Caspian Basin, whose fields are located in Azerbaijan, Kazakhstan and Turkmenistan. The pipeline through Turkey starts in Baku and carries oil from Azeri fields.

When the pipeline was being developed in 2001, "there was a lot of excitement that non-Middle Eastern oil, especially from the Soviet Union, would be an alternative source of oil," said Bulent Aliriza, an analyst with the Washington-based Center for Strategic and International Studies. "The hype at the time was that the oil of the Caspian would rival that of the Middle East."

Oil companies looked for a way of bringing the oil to Western markets and U.S. officials insisted that for political reasons a pipeline should be built through Turkey, bypassing the Middle East and Russia.

But many Caspian estimates proved to be unrealistic, at least in the short term. Experts now say the Caspian should in coming years pump some 4 million to 5 million barrels per day, on par with Iran.

Russia itself pumps about a much oil as Saudi Arabia, but in many Western countries there are political fears of being too dependent on Russia. There is also concern that Russia itself will need more oil as its economy becomes more industrialized.

At Ceyhan, the new oil terminal is expected to begin pumping 200,000 barrels a day in June and eventually reach 1 million barrels per day by 2010.

But with world economies, especially the United States, China and India, booming, oil consumption is also projected to increase sharply, draining excess oil from the markets.

Production in the North Sea and North America is expected to begin falling in the coming years, and much of the new non-OPEC oil is projected to just compensate for those declines.

"The U.S. in particular would dearly love it if it did not have to rely on countries like Saudi Arabia and Iraq for its oil needs, but there is no way of getting around it," said Michael Ritchie, editor of Nefte Compass, a weekly newsletter on oil and gas in the former Soviet Union.

More than half the global reserves are in the Gulf, and the "world will need the oil that is there more than ever," said John van Schaik of Energy Intelligence, an energy publishing company based in New York.

Middle Eastern nations in the Organization of Petroleum Countries, led by Saudi Arabia, produce about a quarter of the world's oil and that is expected to grow to 30 percent by 2015. And Persian Gulf oil is among the cheapest in the world to extract.

It costs about US$12 for the United States to produce a barrel of oil in the Gulf of Mexico, about the same as it costs to produce a barrel of in the Caspian. But in Saudi Arabia, where it is easier to drill the oil, a barrel costs only US$3 to produce, according to the International Energy Agency.

"If the price of oil falls, given that oil production costs ... in the Middle East, where are you going to go?" asked Aliriza.

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Associated Press Writer Selcan Hacaoglu contributed to this report from Ankara, Turkey.

Editorial Notes: Original title: "New Caspian Oil Likely to Cushion Market". -LJ

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