U.S. places large bet on pipeline

May 15, 2005

NEW YORK – American-backed plans to build a nearly 1,100-mile-long oil pipeline from the Caspian Sea to the Mediterranean are about to go from what skeptics once called a “pipe dream” to a reality.

Trailing from Baku, Azerbaijan, through Georgia to the Turkish seaport of Ceyhan, British energy giant BP will bring the Baku-Tbilisi-Ceyhan (BTC) pipeline on line this month. One of the longest oil routes in the world, it’s expected to pump 1 million barrels of oil a day by 2010.

With oil prices skyrocketing, the hope is the pipeline will bring consumers in the West a steady flow of oil while avoiding the usual risks. No shaky Middle East regimes to deal with. No tricky negotiations with unfriendly OPEC nations. Instead, the theory goes, oil would flow smoothly through the rugged deserts and steep mountainsides of cash-starved former Soviet republics. Along the way, the $3.6 billion project would bring foreign investment and much-needed economic development to the region.

President Bush sees the BTC pipeline as a critical piece of America’s energy policy for the future.

“Greater energy security through a more diverse supply of oil for global energy markets, these are the engines of global growth, and with this pipeline those engines can now run at high speed,” Bush said on the eve of the pipeline’s construction launch two years ago.

But the project represents a big gamble for the United States in an energy-rich region traditionally dominated by Russia and Iran. The pipeline could undercut Iranian oil production and compete with Russian-controlled oil routes, which has provoked some grumbling from both countries.

To guard against threats, the United States has spent $64 million to train Georgian troops in antiterrorism tactics. American military officials have said the United States will spend an additional $100 million to train and equip the Caspian Guard, a network of special operations and police units that will protect oil facilities and key assets in the region, the Wall Street Journal reported in April.

Much of the pipeline operations are orchestrated from BP’s offices in Baku, the capital of Azerbaijan. A few miles from the phalanx of rusting Soviet-era oil derricks that line the city’s coast, BP’s headquarters are tucked away in the ultralux Park Hyatt Hotel, a modern pastel confection of a building.

In the lobby, dark-haired Russian women in stiletto heels, thick lipstick and Gucci sunglasses lounge on suede couches. German businessmen chomp on overpriced sandwiches. Doormen eye visitors warily at the entrance. The hotel is the nexus of the modern Wild West, where Western oil executives and Soviet-era strong men are corralling a new energy corridor.

In his sleek office several floors up, BTC Company CEO Michael Townshend plots a crucial part of the Caspian region’s economic future. The oil exec has spent much of his career jetting from pipeline to platform, from Alaska to Nigeria, Australia and Texas.

For the past decade, Townshend has been in Baku on a mission even the most sanguine of oil men would call hellish. BP and 10 other stakeholders that form the BTC Co. have bet billions that the Caspian region will be the next big thing in global energy production.

Winning the bet means coping with howling winter winds in eastern Turkey that have thrown construction off schedule and off budget; clearing mine fields along the pipeline’s route that are leftover from the conflict between Armenia and Azerbaijan; and dealing with the threat of sabotage by rebel groups in Georgia’s breakaway republics.

Townshend believes the hassle is worth it, even as he acknowledges that what comes out of this oil field through his BTC pipeline will cover just a fraction of world demand.

“But,” he says, “the oil that comes out of BTC is about a quarter of the new growth of oil production. In that respect it’s very significant, especially since it’s a non-OPEC, non-Russian source of oil.”

Some experts have doubts. Bulent Aliriza, a Caspian region political analyst at the Center for Strategic and International Studies, said the BTC route could be a boon for Turkey. He worries, however, that the pipeline could spark conflict between the United States and Russia, or even Iran.

“You can build the best pipeline in the world but once the politics change you can’t use it,” Aliriza said.

Plus, Aliriza said, there might not be enough oil in the BTC pipeline to make it economical. When the Clinton administration first pitched its ambitious plan to transport Caspian Sea oil to the West in 1994, the landlocked body of water in Russia’s back yard was hailed as the “new Persian Gulf.” Some estimated that the Caspian area could hold as much as 233 billion barrels of oil, a close runnerup to Saudi Arabia – eight times the estimated 29 billion barrels of proven oil reserves in the United States.

Much of the exuberance of those years has dissipated; now the U.S. Energy Information Administration estimates the Caspian Sea could hold from 17 billion to 33 billion barrels of proven oil reserves. By 2010, analysts expect the countries in the region to produce from 2.4 million to 5.9 million barrels per day, rivaling South America’s largest oil producer, Venezuela. But several Western oil companies have recently pulled out of exploration in parts of the Caspian as wells have come up dry.

That does not bode well for the BTC pipeline, which needs a steady and abundant supply of oil to make BP’s investment pay off. Scarce oil in the Azerbaijan section of the Caspian could force BP to hunt for fields elsewhere, Aliriza said.

Townshend disagrees

“The economics is based only on the oil we know we have,” he said. “If there was no more oil that came into BTC, that’s fine. We don’t speculate as to whether it will be economical if we get oil from say Kazakhstan. It is purely based on what we know we’ve got.”

The pipeline’s success also depends on backing from international lenders. The U.S. Export-Import Bank and the Overseas Private Investment Corporation, have signed off on $250 million in loan guarantees. The European Bank for Reconstruction and Development, World Bank and others are financing about 70 percent of the project.

“These international lenders are not pushovers,” said Steve Mann, the White House’s Caspian Basin energy adviser. “They have tough environmental policies, so if the BTC Co. can get these plans through them that’s a great vote of approval.”

But the pipeline has received few votes of confidence from environmentalists in Georgia. They worry that the oil route’s path across the rugged terrain of the Caucasus Mountains could make it vulnerable to damage from landslides and cause an ecological disaster.

Spanning a distance roughly the equivalent of a train ride from Miami to New York, the pipeline makes 1,500 river crossings, including one near the Borjomi Gorge in Georgia. Environmentalists worry an oil leak could pollute the water there and devastate the country’s economy.

Troubled waters

The Kura River cuts a cool, foamy line down a narrow sluice of black boulders in Borjomi. Wood shacks with corrugated iron roofs line the river’s bank. Wood-burning stoves churn charred chimney air over the river’s swirl of white water.

The water here is mythic and enduring. Every year, thousands of summer revelers descend on Borjomi for a dip in the western Georgian mountain town’s steaming hot mineral water springs. Though the handful of rustic sanatoriums and refurbished 19th century hotels are not exactly four-star establishments, Borjomi is one of Georgia’s biggest tourism engines. For decades, this resort town of roughly 17,000 has drawn everyone from Russian czars to soccer stars.

Once known as the Aspen of imperial Russia, Borjomi is home to one of Eastern Europe’s most widely distributed brands of mineral water. The Georgian Glass and Mineral Water Company sold 131 million bottles of Borjomi mineral water in 2003, raking in roughly $90 million in revenue. Production of the mineral water has been like an elixir for Georgia’s ailing economy, generating 10 percent of the country’s total exports.

“It’s the Coca-Cola of the ex-Soviet Union,” said Georgian Glass and Mineral Water Company CEO Jacques Fleury.

He and others worry that routing the pipeline through the Borjomi region could jeopardize the mineral water source. Any hint of a problem with the pipeline could spell disaster for the company.

“We have to cope with it, but it is a little difficult,” Fleury said. “We are being told that the maximum has been done to protect the environment, but we’re not yet convinced. If there’s a leakage I don’t know how we would recover.”

Neither does the Georgian government. In July, Georgia’s minister of environment, Tamar Lebanidze, ordered a two-week halt to construction of the pipeline near Borjomi. Lebanidze worried BP had not taken enough steps to guard against oil spills.

“We consider Borjomi an area of very high sensitivity, the most sensitive along the whole pipeline,” Lebanidze said.

The Georgian government is especially concerned about the nearby Borjomi-Kharagauli National Park. Home to some 1,600 unique plant species and the endangered Caucasian leopard, the 195,000-acre nature preserve is an oasis of conservation in a region decimated by years of Soviet neglect and endemic poverty.

“If the pipeline breaks it would not only ruin the ecology of the national park, it would bankrupt the whole country,” said Kakha Tolordava, a spokesman for the Tbilisi office of the World Wide Fund for Nature, a group that helps maintain the preserve.

There’s reason for concern. Last year, Britain’s Parliament opened an inquiry into whistle-blower reports that BP did not follow proper design safeguards and used a faulty adhesive to seal the pipeline joints.

BP acknowledged the company had to dig up large sections of the pipeline in 2003 to repair corrosion in about one-quarter of the pipe joints in Georgia – 1,560 in all. But the company says the risk has been exaggerated and the problems fixed. Late last year, BP also provided $6 million to enhance pipeline security in the Borjomi region and an additional $40 million for development programs.

But the security plan has done little to reassure some of the project’s backers. Late last year, Banca Intesa, one of Italy’s largest banks, said it plans to sell off part of its $60 million stake in the pipeline because of fears over a potential leak.

An oil leak would be no small affair for Georgia, a nation roughly the size of South Carolina. The impoverished country is expected to earn about $50 million to $65 million in annual transit fees from the BTC pipeline – big money for a country with an annual budget of $1 billion.

But environmentalists and human rights activists say no price can be placed on the potential damage. In the past year, government forces have clashed violently with antipipeline protesters on more than a dozen occasions.

BP officials acknowledge the route is far from ideal, but they say their hands are tied.

“Every Georgian has a childhood memory of spending time in Borjomi so we knew it would be difficult,” said Ed Johnson, BP’s former project manager here.

“But for security, and other reasons it was the only way to go, so we threaded the needle through Borjomi. It automatically creates a lack of faith in what the company wants to do.”

Moving mountains

About an hour’s drive from Borjomi, the car bogs down in mud about halfway up the road. The driver, a gray-haired man with a weather-worn face, struggles with the gearshift on his rusty Soviet-era sedan. The engine grinds as the car’s balding tires squeal their discontent.

The driver shakes his head. A landslide has made the road impassable. He lights a cigarette and tells his passenger, Tamuna Kurtanidze, he’ll wait but she’ll have to walk the rest of the way. Kurtanidze, a human rights activist with the Georgian environmental group Green Alternative, gets out, her white sneakers sinking into the ankle-deep mud.

The soil in Dgvari has been shifting for centuries. The tiny farming village is smack in the middle of the Lesser Caucasus Mountains, in one of the most geologically unstable regions in the world.

Landslides regularly send torrents of mud crashing through the village. Heaps of the stuff roll up the sides of homes, staining stone walls, seeping beneath doorjambs.

Like many settlements along the oil route, Dgvari barely rates a tick on most maps. Life here has never been easy, and villagers say it’s gotten worse since BP began building a section of the BTC pipeline on a nearby ridge.

Kurtanidze travels to Dgvari and other villages, collecting grievances. She is part of the small army of international human rights activists monitoring the pipeline construction.

“One crack in the pipeline could level all of Dgvari,” she said. “What we want to know is who is going to help the villagers in Dgvari and in other towns when that happens.”

BP has offered $1 million to help resettle villagers, leaving it to the Georgian government to distribute the money and help people move out of the danger zone. The government, in turn, said late last year it would pay the entire village about $440,000 for resettlement.

The pipeline lies near the path of five known active landslide faults in Georgia, including one near Dgvari. Severe as the risk might sound, geophysicist Tamaz Chelidze casts a cool, scientific eye on the potential danger. The threat of a rupture is real, he said, but if the pipeline were damaged, the environmental fallout is not necessarily insurmountable.

“When you have those kinds of faults, of course, it’s quite dangerous,” Chelidze said. “But that doesn’t mean people can’t live there. People have lived there for centuries.”

Villagers here are not convinced. Some are packing to leave, including Gocha Gogoladze. The 52-year-old farmer spits at the long gash running down the concrete wall of his house. Nearly every house in Dgvari has one like it.

It started as a hairline fracture last fall, in a storage room wall behind a row of mason jars filled with pickled vegetables. Now, months after BP’s heavy construction trucks arrived, the crack is a foot wide.

“It’s dangerous,” he said. “No one can live like this.”

Deep doubts in Atskuri

The pipeline isn’t playing out well with villagers near Georgia’s border with Turkey either. Out here at the remote western end of Georgia’s wind-swept countryside, huge black metal pipes snake along the steep undulating curves of rusty, yellow mountain ridges. Half-buried in the crumbling brown earth, the pipeline yawns across the barren landscape.

About a half-mile from the pipeline, near the village of Atskuri, men in leather jackets and wool caps huddle by a roadside kiosk, drink beer and watch BP’s trucks rumble down the road.

There is little else to do in Atskuri other than watch the days slide by, says Gela Mumaladze. The village’s 39-year-old town headman hoped that would change when BP began building the pipeline nearby.

“They promised they would give us work, but so far they’ve hired maybe five people in the past two months.”

High expectations have led to deep disillusionment in Georgia. BP estimates the pipeline will have created about 10,000 temporary jobs by the time it’s operational. But only about 250 people will be permanently hired in Georgia. Construction has been delayed several times because of violent protests over labor disputes.

“People were told that there would be 70,000 Georgians that were going to be employed because of this pipeline,” BP’s Johnson said. “The (Georgian) government needed to sell the project to its own people so some of the benefits were overblown.”

A few miles from Atskuri, in the tiny town of Tnisi, 45-year-old shopkeeper Tsiala Gakhishvili walks alongside the land her family has farmed for 12 years. After pipeline construction crews built a dam nearby, water from the Kura River flooded the plot, she said.

BP officials said the company has promised to pay some 35,000 landowners about $130 million for land along the pipeline’s route. But Gakhishvili said she is not one of them.

“We told BP they ruined our land. They said, “It’s not our fault,’ and refused to do anything about the problem,” Gakhishvili said.

Johnson said Georgia’s muddled Communist-era property laws have made sorting out landowners’ claims difficult. He said disappointments are par for the course when large-scale projects bring a flood of money into impoverished regions.

“Imagine being in a place where no one has ever sold or exchanged property,” Johnson said. “That means you can have 4,000 different standards for property sales. It really sets up an atmosphere of mistrust between people and the company.”

Tensions aside, Bush administration officials say the BTC pipeline is setting a high standard for future large-scale energy projects around the world. Mann, the White House adviser, dismissed concerns about the pipeline’s effect on the environment and local economies, saying BP and its partners have brought an “unprecedented level of transparency” to the project.

“It’s a tremendous success because not only have the companies managed to build this but they have built it in a way that is setting a new benchmark for pipeline projects,” Mann said. “Future pipeline projects around the world are going to have to meet BTC standards.”


Tags: Energy Infrastructure, Fossil Fuels, Geopolitics & Military, Oil